CHAPTER 4
The Monetary System: What It Is and How It
Works
A PowerPointTutorial
To Accompany
MACROECONOMICS, 8th Edition
N. Gregory Mankiw
Chapter 2
Stock of assets
Stock of assets
Used for transactions
Used for transactions
A type of wealth
A type of wealth
Money
As a medium of exchange, money is used to buy goods and services. The ease at which an asset can be converted into a
It serves as a store of value, unit of account, and a medium of
Chapter 4
Money is the yardstick with which we measure economic transactions. Without it, we would be forced to barter. However, barter requires the
double coincidence of wants—the unlikely
Fiat money is money by declaration. It has no intrinsic value.
Commodity money is money that has intrinsic value.
When people use gold as money, the
Chapter 6
The government may get involved in the monetary system to help people reduce transaction costs. Using gold as a currency is costly because the purity and weight has to be verified. Also,
coins are more widely recognized than gold bullion.
The government then accepts gold from the public in exchange for gold-certificates— pieces of paper that can be redeemed for actual gold. If people trust that the government will give them the gold upon request, then the currency will be just as valuable as the gold itself—plus, it is easier to carry around the paper than the gold. The end result is that because no one redeems the gold anymore and everyone
The money supply is the quantity of money available in an economy. The control over the money supply is called monetary policy.
In Iran, monetary policy is conducted in an institution called the central bank. The central bank in the
Chapter 8
To expand the money supply:
The Federal Reserve buys U.S. Treasury Bonds
and pays for them with new money.
To reduce the money supply:
The Federal Reserve sells U.S. Treasury Bonds
and receives the existing dollars and then destroys them.
The bearer of the United States Treasury bond is
hereby promised the repayment o
f the principle value plus the in
terest which it incurs through th
e terms stated thereof.
The United State s will justly repa
y its bearers in its
entirety and will not default u
nder any circumstances.
Signature of the President ______________
_____
The
Federal Reserve
controls
the money supply in 3 ways:
Conducting Open Market Operations
(buying and selling U.S. Treasury bonds).
Changing the Reserve requirements
(never really used).
Changing the Discount rate which
member banks (not meeting the reserve requirements) pay to borrow from the
The bearer o
f the United States Treasury bon
d is hereby promised the repaymen
t of the pri nciple value plus t
he interest which it incurs throu
gh the terms stated thereof.
The United S
tates will j ustly repay its bearers
in its entir ety and will not def
ault under a ny circumstance
s. Signature of
the Preside nt ____________
_______
Chapter 10
How the Quantity of Money is Measured
?
Currency (C)
Checking accounts Cash
M1 + plus money market mutual
fund balances, savings deposits,
and small time deposits
(M2) Demand
M = C + D
Money Supply Currency Demand Deposits
With no Bank: There is $1,000 of currency in the economy,
Chapter 12 The deposits that banks have received but have not lent out are called reserves. Consider the case where all deposits are held as reserves: banks accept deposits, place the money in reserve, and leave the money there until the depositor makes a withdrawal or writes a check against the balance.
The deposits that banks have received but have not lent out are called reserves. Consider the case where all deposits are held as reserves: banks accept deposits, place the money in reserve, and leave the money there until the depositor makes a withdrawal or writes a check against the balance.
In a 100-percent-reserve banking system, all deposits are held in reserve; thus the banking system does not affect the supply of money.
In a 100-percent-reserve banking system, all deposits are held in reserve; thus the banking system does not affect the supply of money.
A Sample 100-Percent-Reserve Bank Balance Sheet
Firstbank Balance Sheet
Assets Liabilities
Reserves $200 Deposits $1,000 Loans $800
Chapter 14
Firstbank Balance Sheet
Secondbank Balance Sheet
Assets Liabilities Assets Liabilities
Reserves $200 Deposits $1,000 Loans $800
Reserves $160 Deposits $800
Loans $640
Firstbank Balance Sheet
Secondbank Balance Sheet
Thirdbank Balance Sheet
Assets Liabilities Assets Liabilities Assets Liabilities
Reserves $200 Deposits $1,000 Loans $800
Reserves $128 Deposits $640
Loans $512 Reserves $160 Deposits $800
Loans $640
Chapter 16 Firstbank Balance Sheet Secondbank Balance Sheet Thirdbank Balance Sheet
Assets Liabilities Assets Liabilities Assets Liabilities
Reserves $200 Deposits $1,000 Loans $800
Reserves $128 Deposits $640
Loans $512 Reserves $160 Deposits $800
Loans $640
Assume each bank maintains a reserve-deposit ratio (rr) of 20 percent and that the initial deposit is $1,000.
Mathematically, the amount of money the original $1000 deposit creates is: Original Deposit =$1,000
Firstbank Lending = (1- rr) $1,000 Secondbank Lending = (1- rr)2 $1,000
Thirdbank Lending = (1- rr)3 $1,000
Fourthbank Lending = (1- rr)4 $1,000
Total Money Supply = [1 + (1-rr) + (1-rr)2 + (1-rr)3 + …] $,1000
= (1/rr) $1,000 = (1/.2) $1,000 = $5,000
Money and Liquidity Creation (but not wealth creation)
Money and Liquidity Creation (but not wealth creation)
The CBs Influence the Money Supply
Money base: B = C + R. Money supply: M = C + D.
Therefore:
1. Money supply is proportional to the monetary base. 2. Decrease in the reserve–deposit ratio raises the
money multiplier and the money supply.
Chapter 18
Problems in Monetary Control
The CB cannot control the money supply perfectly.
Examples:
•Banks hold more excess reserves (increases rr), lowers the money supply
Bank Capital, Leverage, and Capital Requirements
Assets Liabilities
Reserves $200
Loans $500
Securities $300
Deposits $750
Debt $200
Capital $50 •Banks use leverage
•Leverage ratio
(total asset/capital=1000)
•High leverage may harm
bank in bad time. (bank run)
Chapter 20
•
The Central Bank of Iran established in 1960.
•
Money and Credit Committee (MCC) is in
charge of
monetary policy.
•
The composition of MCC is not optimal.
•
The monetary policy is dominated by
Quantity of Money in Iran
1393Q2 (trillion R)
Currency 293 0.26
Money Base 111 1
M1 119 1.08
Chapter 24
Money
Store of value Unit of account
Medium of exchange Fiat money Commodity money Gold Standard Money supply Monetary policy Central bank Federal Reserve Open-market operations Currency Demand deposits Reserves 100-percent-reserve banking Balance sheet Fractional-reserve banking Financial intermediation Bank capital Leverage Capital requirement Monetary base Reserve-deposit ratio Currency-deposit ratio Money multiplier High-powered money Discount rate Reserve requirements Excess reserves
