10: Money and Banking
- Page ID
- 312760
\( \newcommand{\vecs}[1]{\overset { \scriptstyle \rightharpoonup} {\mathbf{#1}} } \)
\( \newcommand{\vecd}[1]{\overset{-\!-\!\rightharpoonup}{\vphantom{a}\smash {#1}}} \)
\( \newcommand{\dsum}{\displaystyle\sum\limits} \)
\( \newcommand{\dint}{\displaystyle\int\limits} \)
\( \newcommand{\dlim}{\displaystyle\lim\limits} \)
\( \newcommand{\id}{\mathrm{id}}\) \( \newcommand{\Span}{\mathrm{span}}\)
( \newcommand{\kernel}{\mathrm{null}\,}\) \( \newcommand{\range}{\mathrm{range}\,}\)
\( \newcommand{\RealPart}{\mathrm{Re}}\) \( \newcommand{\ImaginaryPart}{\mathrm{Im}}\)
\( \newcommand{\Argument}{\mathrm{Arg}}\) \( \newcommand{\norm}[1]{\| #1 \|}\)
\( \newcommand{\inner}[2]{\langle #1, #2 \rangle}\)
\( \newcommand{\Span}{\mathrm{span}}\)
\( \newcommand{\id}{\mathrm{id}}\)
\( \newcommand{\Span}{\mathrm{span}}\)
\( \newcommand{\kernel}{\mathrm{null}\,}\)
\( \newcommand{\range}{\mathrm{range}\,}\)
\( \newcommand{\RealPart}{\mathrm{Re}}\)
\( \newcommand{\ImaginaryPart}{\mathrm{Im}}\)
\( \newcommand{\Argument}{\mathrm{Arg}}\)
\( \newcommand{\norm}[1]{\| #1 \|}\)
\( \newcommand{\inner}[2]{\langle #1, #2 \rangle}\)
\( \newcommand{\Span}{\mathrm{span}}\) \( \newcommand{\AA}{\unicode[.8,0]{x212B}}\)
\( \newcommand{\vectorA}[1]{\vec{#1}} % arrow\)
\( \newcommand{\vectorAt}[1]{\vec{\text{#1}}} % arrow\)
\( \newcommand{\vectorB}[1]{\overset { \scriptstyle \rightharpoonup} {\mathbf{#1}} } \)
\( \newcommand{\vectorC}[1]{\textbf{#1}} \)
\( \newcommand{\vectorD}[1]{\overrightarrow{#1}} \)
\( \newcommand{\vectorDt}[1]{\overrightarrow{\text{#1}}} \)
\( \newcommand{\vectE}[1]{\overset{-\!-\!\rightharpoonup}{\vphantom{a}\smash{\mathbf {#1}}}} \)
\( \newcommand{\vecs}[1]{\overset { \scriptstyle \rightharpoonup} {\mathbf{#1}} } \)
\(\newcommand{\longvect}{\overrightarrow}\)
\( \newcommand{\vecd}[1]{\overset{-\!-\!\rightharpoonup}{\vphantom{a}\smash {#1}}} \)
\(\newcommand{\avec}{\mathbf a}\) \(\newcommand{\bvec}{\mathbf b}\) \(\newcommand{\cvec}{\mathbf c}\) \(\newcommand{\dvec}{\mathbf d}\) \(\newcommand{\dtil}{\widetilde{\mathbf d}}\) \(\newcommand{\evec}{\mathbf e}\) \(\newcommand{\fvec}{\mathbf f}\) \(\newcommand{\nvec}{\mathbf n}\) \(\newcommand{\pvec}{\mathbf p}\) \(\newcommand{\qvec}{\mathbf q}\) \(\newcommand{\svec}{\mathbf s}\) \(\newcommand{\tvec}{\mathbf t}\) \(\newcommand{\uvec}{\mathbf u}\) \(\newcommand{\vvec}{\mathbf v}\) \(\newcommand{\wvec}{\mathbf w}\) \(\newcommand{\xvec}{\mathbf x}\) \(\newcommand{\yvec}{\mathbf y}\) \(\newcommand{\zvec}{\mathbf z}\) \(\newcommand{\rvec}{\mathbf r}\) \(\newcommand{\mvec}{\mathbf m}\) \(\newcommand{\zerovec}{\mathbf 0}\) \(\newcommand{\onevec}{\mathbf 1}\) \(\newcommand{\real}{\mathbb R}\) \(\newcommand{\twovec}[2]{\left[\begin{array}{r}#1 \\ #2 \end{array}\right]}\) \(\newcommand{\ctwovec}[2]{\left[\begin{array}{c}#1 \\ #2 \end{array}\right]}\) \(\newcommand{\threevec}[3]{\left[\begin{array}{r}#1 \\ #2 \\ #3 \end{array}\right]}\) \(\newcommand{\cthreevec}[3]{\left[\begin{array}{c}#1 \\ #2 \\ #3 \end{array}\right]}\) \(\newcommand{\fourvec}[4]{\left[\begin{array}{r}#1 \\ #2 \\ #3 \\ #4 \end{array}\right]}\) \(\newcommand{\cfourvec}[4]{\left[\begin{array}{c}#1 \\ #2 \\ #3 \\ #4 \end{array}\right]}\) \(\newcommand{\fivevec}[5]{\left[\begin{array}{r}#1 \\ #2 \\ #3 \\ #4 \\ #5 \\ \end{array}\right]}\) \(\newcommand{\cfivevec}[5]{\left[\begin{array}{c}#1 \\ #2 \\ #3 \\ #4 \\ #5 \\ \end{array}\right]}\) \(\newcommand{\mattwo}[4]{\left[\begin{array}{rr}#1 \amp #2 \\ #3 \amp #4 \\ \end{array}\right]}\) \(\newcommand{\laspan}[1]{\text{Span}\{#1\}}\) \(\newcommand{\bcal}{\cal B}\) \(\newcommand{\ccal}{\cal C}\) \(\newcommand{\scal}{\cal S}\) \(\newcommand{\wcal}{\cal W}\) \(\newcommand{\ecal}{\cal E}\) \(\newcommand{\coords}[2]{\left\{#1\right\}_{#2}}\) \(\newcommand{\gray}[1]{\color{gray}{#1}}\) \(\newcommand{\lgray}[1]{\color{lightgray}{#1}}\) \(\newcommand{\rank}{\operatorname{rank}}\) \(\newcommand{\row}{\text{Row}}\) \(\newcommand{\col}{\text{Col}}\) \(\renewcommand{\row}{\text{Row}}\) \(\newcommand{\nul}{\text{Nul}}\) \(\newcommand{\var}{\text{Var}}\) \(\newcommand{\corr}{\text{corr}}\) \(\newcommand{\len}[1]{\left|#1\right|}\) \(\newcommand{\bbar}{\overline{\bvec}}\) \(\newcommand{\bhat}{\widehat{\bvec}}\) \(\newcommand{\bperp}{\bvec^\perp}\) \(\newcommand{\xhat}{\widehat{\xvec}}\) \(\newcommand{\vhat}{\widehat{\vvec}}\) \(\newcommand{\uhat}{\widehat{\uvec}}\) \(\newcommand{\what}{\widehat{\wvec}}\) \(\newcommand{\Sighat}{\widehat{\Sigma}}\) \(\newcommand{\lt}{<}\) \(\newcommand{\gt}{>}\) \(\newcommand{\amp}{&}\) \(\definecolor{fillinmathshade}{gray}{0.9}\)- 10.1: Introduction to Money and Banking
- This page covers the evolution of money, beginning with historical examples like cowrie shells as a medium of exchange. It discusses the functions and measurement of money (currency, M1, M2) and highlights the role of banks in money creation. The chapter also relates money's evolution to macroeconomic objectives such as growth, low unemployment, and low inflation, providing a foundation for understanding monetary and fiscal policies in economic analysis.
- 10.2: Defining Money by Its Functions
- This page explains the functions of money, detailing how it serves as a medium of exchange, store of value, unit of account, and standard of deferred payment, surpassing barter's inefficiencies. It contrasts commodity money, which has intrinsic value (e.g., gold), with fiat money, which holds value through government decree and public trust. The evolution from commodity to fiat money highlights the necessity for a flexible monetary system in expanding economies.
- 10.3: Measuring Money- Currency, M1, and M2
- This page defines M1 and M2 money supplies in the U.S., highlighting that M1 consists of liquid assets like cash and checkable deposits, while M2 includes M1 plus less liquid accounts like time deposits. The Federal Reserve monitors these metrics, indicating the amount of currency in circulation. It clarifies that debit and credit cards are access tools for funds, not money itself, and emphasizes the contemporary understanding of money as linked to bank accounts beyond physical cash.
- 10.4: The Role of Banks
- This page discusses banks as crucial financial intermediaries, detailing their role in managing deposits and loans while reducing transaction costs. It contrasts banks with savings institutions and credit unions, introduces balance sheets to understand assets and liabilities, and emphasizes careful asset management to maintain net worth. Strategies such as loan diversification and secondary market sales are highlighted to mitigate risks.
- 10.5: How Banks Create Money
- This page examines the dynamics between banks and money creation, highlighting banks as financial intermediaries that increase the money supply through loans, illustrated by Singleton Bank. It explains the money multiplier effect and discusses the benefits and risks of banking.
- 10.6: Key Terms
- This page defines essential financial terms related to assets, money, and banking, covering concepts like asset-liability mismatches, balance sheets, and bank capital. It discusses various forms of money, including fiat and commodity, as well as financial instruments such as credit and debit cards, demand deposits, and money market funds. Additionally, it highlights money's functions as a medium of exchange and store of value, alongside the roles of financial institutions in the economy.
- 10.7: Key Concepts and Summary
- This page explains the definition and functions of money, highlighting its roles as a medium of exchange, unit of account, store of value, and standard of deferred payment. It differentiates between commodity money and fiat money, while discussing the measurement of money through M1 and M2.
- 10.8: Self-Check Questions
- This page explores the functions and classifications of money and financial assets, specifically discussing casino chips as money and the qualities of items serving as a store of value. It distinguishes between M1 and M2 monetary classifications, providing examples. Additionally, it covers the nature of bank assets and how a borrower's payment history and market interest rates affect the secondary loan market, emphasizing risk assessment in loan valuation.
- 10.9: Review Questions
- This page covers the functions of money in trade facilitation and transaction simplification, explains the components of money (M1 and M2), and defines banks as financial intermediaries. It discusses banks' balance sheets, assets, liabilities, net worth calculations, risks of non-diversified loans, and the concept of asset-liability time mismatches. Additionally, the process of money creation and the money multiplier formula are detailed.
- 10.10: Critical Thinking Questions
- This page covers the evolution of money, highlighting cowrie shells and technological influences, along with the challenges of barter. It examines the Federal Reserve's role in monitoring money supply (M1 and M2), contrasts U.S. currency distribution with cash availability, and discusses the asset-liability distinctions for banks and individuals. The implications of reserve requirements for banks and their adjustments in crises, such as the Great Recession, are also analyzed.
- 10.11: Problems
- This page discusses the impact of transactions on money supply, specifically M1 and M2, in banking. It examines changes in M1 and M2 from cash deposits and uses a T-account to illustrate a bank's assets and liabilities. An example with Humongous Bank details reserve requirements and loans, highlighting how monetary policy influences money supply in a multi-bank system. Overall, it emphasizes bank operations and the mechanics of money supply.