CHAPTER
6.1
6
MONEY
Functions Of Money
(1) A medium of
(2) A unit of
&
BANKING
(p.103)
/ means of payment
/ standard
of value
(3) A store of
(4) A standard of
6.2
Properties Of Money
(p.104)
(1)
(2)
(3)
6.3
(4)
(5)
(6)
Types Of Money
(p.105)
(1)
money (usually non-metallic)
E.g. shells, tobacco, silk
(2)
money
Precious metal e.g. gold and silver
(3) Paper money
(a) Convertible paper money
It was backed up fully by precious metal and was convertible to precious metal
on demand.
(b)
Inconvertible paper money
It could not be convertible into gold or silver on demand.
(i)
credit money : money not backed by a reserve to 100% of its value
(ii) fiat money :
(iii) token money :
(iv) legal tender :
1
(4) Electronic money or plastic money
E.g. credit card, ATM, EPS
(i)
money substitute :
(ii)
near money :
6.4
What Is Money ?
(p.110)
(a) Money is defined as a
If so, money includes only currency circulated in the public(Cp) and
( M1 =
)
But money should be expanded to include other assets e.g. saving deposits,
 M2 =
M3 =
These inclusion emphasize money
function as a
of
(b) Modern financial innovations complicate the definitions. E.g. saving deposits
now serve as a
of
through the use of EPS.
(c) Different financial assets have different degree of
oneyness’.
Refer to fig.1 on p.111
** Economists believe that the amount that people spend is related to the amount of
they have available. Watching the Ms is important in an attempt
to understand and predict aggregate
. Monetarists see control of the
Ms as the most important aspect of economic policy.
6.5
Credit Creation / Deposit Creation
An initial change of cash in the banking system will lead to a
change in the value of total deposits.
A.
Assumptions
(1)
(2)
(p.115)
reserve requirement
No
reserves
2
.
(3)
Unlimited demand for
(4)
No cash
B. Mechanism
Given the reserve ratio (r) is 20% and there is $1,000 cash deposit from the public.
Bank 1
Assets
R:
L:
Liabilities
D:
Bank 2
Assets
R:
L:
Liabilities
D:
Bank 3
Assets
R:
L:
Total deposit created :
Liabilities
D:
=
=
=
Q.
What is the change in money supply ?
C.
Reasons for the credit creation be smaller than that suggested by the banking
multiplier
(1)
If the required cash reserve ratio is 100%
Any change in cash held by the public will lead to an
cash held by the banking system  change in D = change in R
Q.
What is the change in MS ?
(2)
(3)
3
change in
(4)
D. Some issues related to credit creation
(1)
Cash reserve ratio is different from liquidity reserve ratio
cash reserve ratio =
liquidity reserve ratio =
(2)
(3)
Whether there is a single bank or many banks in the banking system
will/will not affect the result of the process of credit creation.
Whether there is or isn
a central bank will/will not affect the result of the
process of credit creation.
4