banking system as a whole can create $ by a multiple of excess reserves
MM X ER = Expansion of $
Money multiplier= 1/RR
News vs Existing $
Initial deposit in a bank comes from the FED/bank purchase of a bond or other $ out of circulation (buried treasure), the deposit immediately increases the $ supply
deposit then leads to further expansion of $ supply through the $ creation process
Total change in MS if initial deposit is new $ = Deposit + $ created by banking system
if deposit in a bank is existing $ (already counted in M1), depositing the amount does NOT change the MS immediately cs it already counted
Existing currency deposited into a checking account changes only the composition of the $ supply from coins.paper $ to checking account depositing
total change in the MS if deposit is existing $ = banking system created $ only
bonds are loans, or IOUs, that represent debt that the govt or corporation must repay to investor
bond holder has no ownership of company
Bonds
First if a corporation issues and then sells a bond
liability or asset is corporation
assets or liability are buyers
If that corporation issues a lok bond with a 10 yr. term and a 5% interest
nominal interest rate = 5%
nominal interest falls 3% = value of bond increases
nominal interest rate rises 8 = value of bond decreases
Stock owners
earn profit in two ways:
Dividends, portions of corporations profit are paid out to stock holders
higher corporate profit, the higher the divided
Capital gain: earned when stockholders sell stock at lower price than purchase price suffers a capital loss
The money market
Demand fir $ has inverse relationship between nominal interest rates and quantity of $ demanded
What happen when demand of $ when in. rates increases?
Quantity demand falls because of individuals would prefer to have interest earning assets instead of borrowed liabilities
What happens when quantity demanded when in. rates decreases
quantity demand increases no incentive to convert cash
Money Demand Shifters
Changes in price lvl
changes in income
changes in taxation that affect investment
Money demand curve slopes decreases and to the shifts because all else being equal higher interest rates increase the opportunity cost of holding $, thus leading public to reduce quantity of $ it demands
Fractional Reserve system
Demand deposits/checks
process by which banks hold a small portion of their deposits in reserves and loan out the excess
banks keep cash on hand which is (RR) to meet depositor's needs
liquidity- ease with which an asset can be accessed and converted into cash
M1 (High Liquidity)- coins, currency, and checkable deposits (personal and corporate checking accounts which are largest compent of M1). AKA demand deposits. Generally money supply
M2 (Medium Liquidity)- M1 and savings deposits ($ market accounts), time deposits (CDs: certificates of deposit), and mutual funds below $100k
M3 (Low Liquidity)- M2 plus time deposits above $100k
