ECU ECON 2133 - Chap. 11 – The Monetary System (5 pages)

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Chap. 11 – The Monetary System



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Chap. 11 – The Monetary System

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Pages:
5
School:
East Carolina University
Course:
Econ 2133 - Principles of Macroeconomics

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1 ECON 2133 Class Outline 3 Chap 11 The Monetary System Money is Whatever people in an economy use to buy goods and services from one another pg 283 Many are not money But some can be quickly converted into money Such assets are said to be highly pg 286 How do we define measure the money supply M1 includes pg 288 289 in circulation 740 bil checking bals 350 bil Other checkable deposits 316 bil Travelers checks Total M1 7 bil 1413 bil M2 includes M1 1413 bil bals 3558 bil MMMF s 763 bil time deposits 100 000 e g CDs 1068 bil Total M2 Financial Intermediaries 6802 bil pg 290 291 Are institutions through which savers provide funds to borrowers banks S Ls Credit unions Insurance co s Pension plan mgmt co s etc 2 The banking system Public banks The central bank Federal Reserve the Fed the public banking sys Regulates the total Fractional reserve banking Public banks must hold a portion of their customers deposit balances as The age of total deposits which banks must hold is the RRR pg 292 With fractional reserve banking the potential total money supply MS 1 RRR x Total Reserves E g If the RRR 10 0 10 and Tot Ress 1000 then Tot MS 1 10 x 1000 10 000 The ratio 1 RRR is called the See pg 300 301 How fract res banking multiplies the MS Bank A gets a new deposit of 1000 If the RRR is 10 the bank must hold 100 of the deposit as reserves but 3 It can use the remaining 900 excess reserves to make a this 900 is new money Suppose the 900 loan check is deposited in Bank B That bank must hold 90 as reserves but can loan out the remaining 810 more And the process continues But where do new deposits come from What if Sue attorney pays Lew landscaper to care for her lawn Assume Sue s checking acct is with Bank A and Lew s is with Bank B Sue writes Lew a check for 100 which he deposits Bank B s deposits reserves and loan potential But these by exactly the same amount for Bank A So the size of the total MS doesn t change The total MS can change bank reserves are added to or taken from



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