Three functions of money in the economy

Liquidity: The ease with which an asset can be converted into a medium of exchange in the economy.

commodity money

fiat money

Money stock: The amount of money flowing in the economy.

Currency: banknotes and coins held by the public.

Demand deposits are bank account balances that depositors can withdraw at any time by writing checks.

Two Measures of the Stock of Money in the Economy

1. Currency issuing bank 2. Bank’s bank (commercial banks deposit commercial reserves with the central bank and are supervised by the central bank) 3. National bank (state property is deposited in the central bank)

Set the money supply

Reserves are deposits that a bank receives but does not lend out.

balance sheet

If banks hold all deposits in the form of reserves, banks do not affect the money supply.

A banking system in which only a portion of deposits are held as reserves.

Reserve ratio (reserve ratio, R) is the proportion of deposits held by banks as reserves.

Banks create money when they hold only part of their deposits as reserves.

The amount of money produced by the banking system using 1 dollar of reserves. =1/R

The higher the reserve ratio, the less money banks lend per deposit, and the smaller the money multiplier.

Leverage adds borrowed currency to existing funds for investment.

Capital requirement: The minimum amount of bank capital determined by government regulations.

1. Open market operations 2. The central bank issues loans to commercial banks

Reserve requirements: The minimum amount of reserves that a bank must hold based on its deposits.

Pay interest on reserves

Overnight difference interest rate → base interest rate

deposit insurance