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Money and Banks
Money Supply
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 The Money
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What is money?
What form can money take?
Why is money worth something?
What happens to the value of the money over
time?
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 The money
 Medium of exchange
 Barter may work but
 Have to find the right partner
 Have to have the double coincidence of wants
 Medium of exchange solves these problems
 Store of value
 Not a perfect one
 Inflation
 Unit of Account
 Also not a perfect one
 Inflation
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 Forms of the money
 Commodities
 Stones on island of Yap
 Cigarettes of POW camps
 Precious metals
 Coins
 Paper money
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Promise to pay, IOU
Fully backed
Fractionally backed
Gold standard
 Fiat money
 Deposit money
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 Bank of Canada
 Central bank
 Banker to the commercial banks
 Reserves
 Banker to the federal government
 Regulator of the money supply
 Regulator of financial markets
 Commercial banks
 Financial intermediaries
 Crediting business
 Cheque/debit card clearing and collection
 Profit seeking
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 Commercial banks
 Reserves
 Bank runs of Great Depression
 Fractional reserve system
 Reserve ratio (actually held)
 Fractional reserve system means reserve ratio < 1
 Target reserve ratio (would like to hold)
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 Commercial bank system creates money
• Suppose a $100 bill is dug from your backyard and
deposited into bank A.
– Assume banks hold 10 percent of deposits as reserves.
– Assume individuals hold no currency.
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Bank A: Assets
Liabilities
Bank B: Assets
Liabilities
Bank C: Assets
Liabilities
Banking system: Assets
Liabilities
This injection of $100 into the banking system will
generate $1,000 of money!!!
• Money Multiplier = 1/reserve ratio = The amount of
money the banking system generates with each $1 of
reserves
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 Commercial bank system creates money
 Money Multiplier = 1/reserve ratio = The amount of
money the banking system generates with each $1 of
reserves
 This is the most money the system could generate, recall
the assumptions:
• Assume banks hold 10 percent of deposits as reserves.
• Assume individuals hold no currency.
 Excess reserves
 Money Multiplier = 1/(actual reserve ratio v)
 Kind of, reserve ratios may differ for the banks
 Cash drain
 If c is the ratio of cash people hold to deposits,
 Money Multiplier = 1/(v + c)
 Excess reserves and cash drain reduce Money Multiplier
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 The money supply = total stock of money in
the economy
 Currency
 In circulation
 Bank deposits
 Differing liquidity of various deposits
 Chequing deposits
 Term deposits
 Liquidity of assets
 Near money = easily convertible into money
 Money Supply Measures
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