Econ 2133 1st Edition Lecture 14Outline of Current Lecture Review of data regarding currencyFunctions of money (3)Fractional Reserve Banking & How it worksHow and why the Money Multiplier ChangesDemand Deposit Expansion ProcessCurrent LectureGraph/ Data set from Dr. Parker’s book – The Handbook of Major Economic Events in History- Hungary’s Monthly inflation Rate July 1946 = 4.19 time 10 to the 160th power- Daily inflation rate was 207% - Took 15 hours for the price level to double - Fiat currency was mass produced and made hyper inflation - When printing money- Zimbabwe in 2008 (mid November) = 98% daily inflation rate- Every 24 hours the price level would double Money Promotes economic efficiency- No Money means bartering (trading goods for goods) would prevail- Requires a “double coincidence of wants” Functions of money:1. Money has to be a medium (something that facilitates communication and transactions) of exchange: money is a facilitator of transactions that replaces barter2. Unit of Account: “one good = one price” where every good has one price- Dollars and cents are the US unit of account, every good has one combination of dollars and cents- Car = 45,600$ - Barrier – N Goods – Every good has N-1 prices; barter economy would yield every good having so many prices in comparison to others.. WOULD BE SO CRAZY HECK NO Like 1 apple is worth 2 bananas, 2 grapefruit, 1 head of lettuce, etc to account for every goodin the system3. Store of Value: a method of transferring wealth into the future - Disposable income - Money’s killer over time is inflation Fractional Reserve Banking: banks keep a small % of deposits as required reserves. But they also then have excess reserves that they can keep or they can loan and invest them. - Money Multiplier is how many time $1 in MB gets “blown up” in M1- Ms = MB x Money multiplier- Change in Money supply = change in money base times change in money multiplier - Fed control monetary base, how and why? (will learn in the next few classes before Exam 3) - How and why does the money multiplier change?These notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.- Depends on:a. Fedsb. Banksc. Borrowersd. Public desire for:I. CurrencyII. Depth of Financial Technology (deeper and more widespread the tech is, the lessand less currency people have to have all the time on themselves) - Demand deposit expansion process: 1. Say I have 100$ in currency. 2. If I take $100 and deposit it in my checking account, the “fun” begins! Because now banking system can get in on the “party” (he has the weirdest way of explaining things) - Now still have 100$ just not in currency, in electronic book entry ‘- So bank takes 10$ (10% is the average required reserve %) in required reserves and now I have 90$ in electronic reserves. - Bank can now even make a loan for 90$ with the excess reserves. Person who sold the good receives 90$ and they deposit in their checking account- Therefore I have 100$ still though 3. Round 2: bank B, 9$ in RR, $81 in ER. Loan is 81$ so $81 in new checking accounts- Now I have 100$, Bank B has 90$ + 81$ = 271$- Keeps continuing on and on until dwindles down to zero 4. So why the money supply expands due to monetary base, could even expand to as much as 10$ because Money Multiplier ($M) would be equal to 10- Meaning the Demand Deposit Expansion Process could blow up every 1$ into 10$ in just M1- Money Multiplier ($M) = 1/ Required Reserve Percentage (RR%); usually 10% on average andwith this rate then Money Multiplier would be 10- If RR% = 25%, $M = 4; RR% and $M are inversely related - If RR% = 50%, $M = 2 - If RR% = 5%, $M = 20- If M1 = MB x $M, fed determines $M:1. RR% - the Fed2. Banks ER Behavior Deposited $100 and my bank kept all of it as reserves, there wouldn’t be a money multiplier 3. Borrowers, dearth of them and banks not making as money loans then $M not rising as much or being as effective 4. Depositors – Public If they hold currency not checking accounts then $M drops too - Fed controls MB but DOES NOT CONTROL the Money