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Funds held in bank that can be withdrawn at any time.

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ratio/rate set by the federal government that a bank must keep of the money they have

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investment!!! demand and supply of money

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investment!!! demand and supply of money

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money supply is set by Fed; money demand = quantity of money people want to hold
demand can be affected by several factors, like interest rates.

Fed: central bank of the US, controls monetary policy. no control of tax rates!
monetary policy: Fed can control money supply/borrowing by targeting interest & inflation rates, to stabilize prices/trust in currency.

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If Mr. Fitz takes out a loan of $100 from the bank, to who is the $100 an asset for and who is it a liability for?

Assets?
Liabilites?

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The person that owes money has a liability, the person money is owed to has an asset

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a network of institutions linking borrowers and lenders.
asset: something OWNED
liability: something OWED
loan: agreement between a lender and borrower, usually at a fee called the interest rate.
- asset for the lender, liability for the borrower

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Network of institutions, links borrowers and lenders

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= ease at whihc asset can be used as a medium of exchange.
M1 = highest liquidity, currency + checking accounts + travelers' checks
M2 = M1 plus savings deposits, time deposits, money market funds

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medium of exchange: buyers give it to sellers when they purchase goods and services
unit of account: the "yardstick" used to post prices/record debts
store of value: people can use it to transfer purchasing power from the present to the future

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commodity: backed by some sort of valuable commodity
fiat: currency backed by faith in the gov't; US currency after 1970

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Commodity is backed by some valuable commodity, like gold

Fiat is backed by faith in gov like US currency

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Present value of dollar received one year from now: $1/(1+r)
Value of a current dollar in a year: $1+r)
r = the rate of inflation.

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Commodity
ex: gold & the US currency from the 1970s
Fiat
ex: currency
(fiat does NOT have an intrinsic value)

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Two people need mutual wants for bartering to be successful

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The idea that money available at the present time is worth more than the same amount in the future due to its potential earning capacity

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Barter system - trade things for other things
Coincidence of wants - two people have things that each other person wants.
Time value of money - Money right now is worth more than money in the future. $10000 now is worth more than $10000 in the future
Commodity Money - money backed by a valuable money (Gold standard)
Fiat Money - money backed by faith (USD today)
Three functions of money
- Medium of Exchange: item buyers give to sellers when they purchase things
- unit of account: people use to post prices
- how easy it is to split
Liquidity - how easy it is to exchange for cash
M1 - High liquidity (currency, checkable bank deposits, travelers checks)
M2 - Saving accounts, time deposit (CD accs), money market funds
Financial Sector - Network of institutions that link borrowers and lenders (banks, mutual funds, pension funds, etc)
Asset - Owned
Liability - Owed
Loan - Asset for lender, liability for borrower
Money supply - set by fed
Money demand - demand for money by people
Fed controls monetary policy (interest rates)
Fractional Reserve system - Banks hold a certain reserve amount and then loan out the rest
Balance Sheet - report of assets and liabilities
Demand deposit - funds in a bank account that can be drawn out at any time (M1)
3 Shifters of Monetary policy
-  Setting reserve requirement
- Open market operaition
- lending money to banks
Interest rates go up, inflation goes down
Increase reserve requirement = lower money supply. lower money supply = interest rate increase. increased interest rates = lower investment / lower GDP
Money Multiplier = 1/ reserve requirement
Discount rate - rate of interest commercial banks pay on loans from the fed
lower discount rate = increased money supply
Open Market Operation - Buying bonds = increase money supply
Federal Funds Rate - Interest rate at which banks lend to other banks

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- people trade goods/services with each other instead of money
coincidence of wants: both suppliers (of two goods to be traded) are both willing to carry out an exchange.

time value of money: idea that the amount of money available now is worth more than the same amount in the future. money is worth more the sooner it is received

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-Coincidence of want- suppliers meeting to discuss exchanges in order to acquire an item they do not have
-Time Value of Money
---PV = $1/(1+r)

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