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Harcourt Brace & Company Welcome to CASESTUDYHELP.COM Different Measures of Money
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Welcome to CASESTUDYHELP.COM
Different Measures of Money
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Definition of Money
Money is nothing but the set of assets in economy that the people usually use for purchasing the goods & services from the other people.
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Functions of Money
Medium of Exchange: Anything which is acceptable readily as the payment.
Unit of Measurement: Money serves as the unit of account which may help people to compare the relative value of commodities and goods.
Storage of Value: A way to keep the wealth in a ready form for the future requirements.
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Two Kinds of Money Commodity Money: The thing which
performs the monetary function and has nonmonetary, or alternative utilization.Illustrations: Silver, Gold , Cigarettes
Fiat Money: The thing which can be served as money but which do not have any other usage.
Illustrations: Currency, Coins, Check
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Money v/s Economy of U.S.
Money Stock is nothing but the quantity of money which is circulated in the country’s economy.
Various ways of money measurement in the economy: M1 M2
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The most common forms of money are as follows: Coins Check Deposits Currency Travelers Checks
Measurement of Money
M1
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Measurement of Money
A wider measure of money than M1 are as follows: M1 + Time Deposits + Saving Deposits + other small categories + Mutual Funds + Money
Market
M2
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Where are these Currency?
In the year 1996 there were outstanding of about $380 billion ($1,900 per person in US).
The Location of outstanding currency includes the following: Currency held by the illegal entities Currency which is held abroad Currency which is held in the businesses
for the transaction purpose.
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Quick Quiz!
Describe the three functions of money.
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Banknotes on Issue
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Value of Bank notes in Circulation
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Bank note Purchases
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Bank notes in Australia 2012/2013
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The monetary aggregates common to the Australian
Money base – It comprises the holding of the coins & notes by the private sector, the deposits made by the banks with Reserve Bank, and the liabilities of Reserve Bank to the private sector. It is also called a 'narrow money' or 'M0'. This is the most liquid measure of the supply of money .
M1 – can be defined as the bank current deposits from the private non-bank sector plus the currency. The M1 can be said to be a very liquid measure of supply of money .
M3 – can be defined as M1 plus all the other (ADI) Authorised Deposit-taking Institution, deposits from the private non-bank sector plus the certificates of the deposits that are issued by the banks less ADI deposits held with each other.
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Changes in Money Supply by the Fed Open-Market Operations: The basic way in
which the Fed changes the supply of money done through the buying and selling of the bonds of U.S. government with the newly printed currency notes.
– For increasing the supply of money , the Fed purchases bonds of government from public.
– For decreasing the supply of money , Fed sells the bonds of government to public.
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Measuring money
Differentiating for what is money from what isn't a money is difficult
For example, the MMMFs (Money Market Mutual Funds) allows the writing of check, but provides a high return than the checking accounts of bank : Is this money?
There is no single measure for the money stock.
– The M1 monetary aggregate Includes the traveler's checks, currency which is held by
the public, the demand deposits (without interest) and the other deposits (with interest).
All the elements of M1 are utilized in making the payments, thus M1 is the closest measure of money to the theoretical money description.
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Fractional Banking Reserve
The Deposits into the banks can be recorded as the assets or liabilities. The Deposits which are received but not lent are known as the reserves.
The money supply in the economy is also affected by the deposit amounts which are kept in bank as reserves.
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Illustration on Bank “T-Account”
Assets Liabilities
ABC National Bank
Reserves$10.00
Loans$90.00
Deposits$100.00
Total Assets$100.00
Total Liabilities$100.00
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Bank “T-Account” Example
A “T-Account” states that the bank’s financial position that accepts the deposits, keeps the portion of reserves and it lends the rest.
Assets Liabilities
First National Bank
Reserves$10.00
Loans$90.00
Deposits$100.00
Total Assets$100.00
Total Liabilities$100.00
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The Money Multiplier
Assets Liabilities
ABC National Bank
Reserves$10.00
Loans$90.00
Deposits$100.00
Total Assets$100.00
Total Liabilities$100.00
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The Money Multiplier
Assets Liabilities
ABC National Bank
Reserves$10.00
Loans$90.00
Deposits$100.00
Total Assets$100.00
Total Liabilities$100.00
Assets Liabilities
XYZ National Bank
Reserves$9.00
Loans$81.00
Deposits$90.00
Total Assets$90.00
Total Liabilities$90.00
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The Money Multiplier
Assets Liabilities
ABC National Bank
Reserves$10.00
Loans$90.00
Deposits$100.00
Total Assets$100.00
Total Liabilities$100.00
Assets Liabilities
XYZ National Bank
Reserves$9.00
Loans$81.00
Deposits$90.00
Total Assets$90.00
Total Liabilities$90.00
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The Money Multiplier
Assets Liabilities
ABC National Bank
Reserves$10.00
Loans$90.00
Deposits$100.00
Total Assets$100.00
Total Liabilities$100.00
Assets Liabilities
XYZ National Bank
Reserves$9.00
Loans$81.00
Deposits$90.00
Total Assets$90.00
Total Liabilities$90.00
Total Money Supply = $190.00!
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What shows the size of the money multiplier?
The money multiplier is nothing but the reciprocal of the reserve ratio. With a reserve
requirement (R) of 20% The multiplier shall be
5.
1 R
M =
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References
Harcourt Brace & Company, ND, “ Different Measures of Money” reviewed on January 6 2015, https://www.google.co.in/webhp?sourceid=chrome-instant&ion=1&espv=2&ie=UTF-8#q=ppt+on+different+measures+of+money
RBA, 2015, “Measuring Money” reviewed on January 6 2015, http://www.rba.gov.au/about-rba/index.html
