ECON 1110 Lecture Notes - Lecture 7: Monetary Base, Capital Requirement, Reserve Requirement

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3 Oct 2016
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Monetary system money: stock of assets that can be readily used to make transactions medium of exchange store of value: has value in the future unit of account. Types of money fiat money no intrinsic value e. g. paper money commodity money inherent value ex. gold standard, cigarettes in prison. Monetary control central bank conducts monetary policy mainly use open mkt operations: buy/sell bonds. Fed has 12 regional banks money supply: quantity of money available in economy. M = c + d reserves: portion of deposits banks have not lent. Deposits fractional-reserve banking: banks keep some reserves banks essentially create money rr: reserve ratio. % of deposits withheld by banks total money supply = (1/rr)*d. Bank capital, leverage, and capital requirements bank capital: resources a banks" owners have put into the bank. Capital leverage=assets/capital high leverage means banks are more susceptible to default capital requirement: minimum amount of capital mandated insures banks can repay higher for banks holding risky assets.

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