monetary system ppt

MONETARY SYSTEMSarah Adiba

Pittra AmrullahAnggrid Astoto

Muhammad Alvian Kusuma W

DEFINITION

• The Monetarry System is the set of institution by which government provides money in a country's economy modern monetary system usually consist of mints, central banks and commercial bank.

• the meaning of money : Money is the set of assets in the economy that people regullary use to buy goods and services from other people. the cash in yor wallet is money because you can use it to buy a meal at the restaurant or a shirt at a clothing store.

THE FUNCTION OF MONEY

• medium exchange : in is an item that buyers give to sellers when they purchase goods and services.

ex: when you buy a shirt at clothing store, the store give you a shirt and you give the store your money.

• unit of account : money is the common standard for measuring relative worth of goods and services. and the other means is the yardstick people use to postprice and recor debts

ex: when you go shopping you might observe that a shirt cost $20 and a hamburger cost $2 even though it would be accurate to say that the price of a shirt is 10 hamburgers and the price of Hamburger 1/10 of a shirt price or never quoted in this way.

• - Store a value : money is the most liquid asset. and item that people can use to transfer purchasing power from the present to the future. Money value can be retained overtime it is a convenion way to store wealth. The term of wealth is used to rever to the total of all stores of value, including both money and monetary assets.

• - Liquidity : the ease with which and asets can be converted into the economist medium of exchange or liquidity measures how easily assets can be spent to buy goods and services.

THE FUNCTION OF MONEY

THE KINDS OF MONEY

•Commodity Money•Fiat Money•Currency•Demand Deposit

THE KINDS OF MONEY

•Commodity Money :• money whose value comes from a commodity of which it is made. Commodity money consists of objects that have value in themselves as well as value in their use as money.• example: gold, silver, cigarette.

THE KINDS OF MONEY

•Fiat Money : • currency which derives its value from government regulation or law. It differs from commodity money, which is based on a good, often a precious metal such as gold or silver, which has uses other than as a medium of exchange. The term derives from the Latin fiat ("let it be done", "it shall be")

THE KINDS OF MONEY• Currency :

• A generally accepted form of money, including coins and paper notes, which is issued by a government and circulated within an economy. Used as a medium of exchange for goods and services, currency is the basis for trade.• Explain: Generally speaking, each country has its own currency. For example, Switzerland's official currency is the Swiss franc, and Japan's official currency is the yen. An exception would be the euro, which is used as the currency for several European countries.

• Investors often trade currency on the foreign exchange market, which is one of the most heavily traded markets in the world.

THE KINDS OF MONEY•Demand Deposit:

•Balances in bank accounts that depositors can accession demand by writing a check. Funds held in an account from which deposited funds can be withdrawn at any time without any advance notice to the depository institution. Demand deposits can be "demanded" by an account holder at any time. Many checking and savings accounts today are demand deposits and are accessible by the account holder through a variety of banking options, including teller, ATM and online banking. In contrast, a term deposit is a type of account which cannot be accessed for a predetermined period (typically the loan's term).•Explains : M1 is a category of the money supply that includes demand deposits as well as physical money, such as coins and currency, and Negotiable Order of Withdrawal (NOW) accounts. According to the Federal Reserve's Consumer Compliance Handbook, demand deposit accounts have these characteristics: no maturity period (or an original maturity of fewer than seven days), payable on demand, may be interest bearing, no limit on the number of withdrawals or transfers an account holder may make, and no eligibility requirements.

BANK AND MONEY SUPPLY

• Bank Reserve :• Bank reserves are the currency deposits which are not lent out to the bank's clients. A small fraction of the total deposits is held internally by the bank or deposited with the central bank. Minimum reserve requirements are established by central banks in order to ensure that the financial institutions will be able to provide clients with cash upon request.• Explains : The main purpose of holding reserves is to avoid bank runs and generally appear solvent. Central banks place these restrictions on banks, because the banks can earn a much larger return on their capital by lending out money to clients rather than holding cash in their vaults or depositing it with other institutions. Bank reserves decrease during periods of economic expansion and increase during recessions.

•Fractional Reserve Banking :• A banking system in which only a fraction of bank deposits are backed by actual cash-on-hand and are available for withdrawal. This is done to expand the economy by freeing up capital that can be loaned out to other parties. Most countries operate under this type of system.

• Also known as "fractional deposit lending".• Many U.S. banks were forced to shut down during the Great Depression because so many people attempted to withdraw assets at the same time. Today there are many safeguards in place to prevent such an instance from occurring again, but the fractional-reserve banking system remains in place

BANK AND MONEY SUPPLY

KEY POINTS

• The main way that banks earn profits is through issuing loans. Because their depositors do not typically all ask for the entire amount of their deposits back at the same time, banks lend out most of the deposits they have collected.

• The fraction of deposits that a bank keeps in cash or as a deposit with the central bank, rather than loaning out to the public, is called the reserve ratio.

• A minimum reserve ratio (or reserve requirement) is mandated by the Fed in order to ensure that banks are able to meet their obligations.

• Because banks are only required to keep a fraction of their deposits in reserve and may loan out the rest, banks are able to create money.

• A lower reserve requirement allows banks to issue more loans and increase the money supply, while a higher reserve requirement does the opposite.

THE MONEY MULTIPLIER

• The money multiplier is the amount of money that banks generate with each dollar of reserves. Mathematical relationship between the monetary base and money supply of an economy. It explains the increase in the amount of cash in circulation generated by the banks' ability to lend money out of their depositors' funds. When a bank makes a loan, it 'creates' money because the loan becomes a new deposit from which the borrower can withdraw cash to spend. This money-creating power is based on the fractional reserve system under which banks are required to keep at hand only a portion (between 10 to 15 percent, typically 12 percent) of the depositors' funds. The rest may be converted into loans, thereby increasing the available cash by a factor that is a multiple of the initial deposit.

FEDERAL RESERVE SYSTEM

•The Federal Reserve System (also known as the Federal Reserve, and informally as the Fed) is the central banking system of the United States.

Current functions of the Federal Reserve System include:• To address the problem of banking panics• To serve as the central bank for the United States• To strike a balance between private interests of banks and the centralized responsibility of government

• To supervise and regulate banking institutions• To protect the credit rights of consumers• To manage the nation's money supply through monetary policy to achieve the sometimes-conflicting goals of


• maximum employment• stable prices, including prevention of either inflation or deflation

• moderate long-term interest rates• To maintain the stability of the financial system and contain systemic risk in financial markets

• To provide financial services to depository institutions, the U.S. government, and foreign official institutions, including playing a major role in operating the nation's payments system

• To facilitate the exchange of payments among regions• To respond to local liquidity needs• To strengthen U.S. standing in the world economy


• The term monetary policy refers to the actions that the Federal Reserve undertakes to influence the amount of money and credit in the U.S. economy. Changes to the amount of money and credit affect interest rates (the cost of credit) and the performance of the U.S. economy. To state this concept simply, if the cost of credit is reduced, more people and firms will borrow money and the economy will heat up.

THE FED'S TOOLS OF MONETARY CONTROL

• Reserve requirementThe reserve requirement (or cash reserve ratio) is a central bank regulation employed by most, but not all, of the world's central banks, that sets the minimum fraction of customer deposits and notes that each commercial bank must hold as reserves (rather than lend out). These required reserves are normally in the form of cash stored physically in a bank vault (vault cash) or deposits made with a central bank.


• Open market operationThe buying and selling of government securities in the open market in order to expand or contract the amount of money in the banking system. Purchases inject money into the banking system and stimulate growth while sales of securities do the opposite.


• DISCOUNT RATEThe interest rate charged to commercial banks and other depository institutions for loans received from the Federal Reserve Bank’s discount window. The discount rate also refers to the interest rate used in discounted cash flow (DCF) analysis to determine the present value of future cash flows. The discount rate in DCF analysis takes into account not just the time value of money, but also the risk or uncertainty of future cash flows; the greater the uncertainty of future cash flows, the higher the discount rate. A third meaning of the term “discount rate” is the rate used by pension plans and insurance companies for discounting their liabilities.


PROBLEMS IN CONTROLLING THE MONEY SUPPLY

1. The Fed does not control the amount of money that consumers choose to deposit in banks.

a. The more money that households deposit, the more reserves the banks have, and the more money the banking system can create.

b. The less money that households deposit, the smaller the amount of reserves banks have, and the less money the banking system can create.2. The Fed does not control the amount that bankers choose to lend.

a. The amount of money created by the banking system depends on loans being made.

b. If banks choose to hold onto a greater level of reserves than required by the Fed (called excess reserves), the money supply will fall.

3. Therefore, in a system of fractional-reserve banking, the amount of money in the economy depends in part on the behavior of depositors and bankers.4. Because the Fed cannot control or perfectly predict this behavior, it cannot perfectly control the money supply.5. Case Study: Bank Runs and the Money Supply

a. Bank runs create a large problem under fractional-reserve banking.b. Because the bank only holds a fraction of its deposits in reserve, it will not

have the funds to satisfy all of the withdrawal requests from its depositors.c. Today, deposits are guaranteed through the Federal Depository Insurance Corporation (FDIC).

PROBLEMS IN CONTROLLING THE MONEY SUPPLY

FYI: THE FEDERAL FUNDS RATE

1. The federal funds rate is the short-term interest rate that banks charge one another for loans.

2. When the federal funds rate rises or falls, other interest rates often move in the same direction

3. In recent years, the Fed has set a target for the federal funds rate

SUMMARY

1. The term money reverse to accept that peopla regulary use to buy goods and services.

2. Money serves three functions as a medium to exchange it provide the item use to make transaction as a unit of account it provide the way in which prices other economic values are recorded. As a store of value, it provides a way of transfering, purhasing power from the present to the future.

3. Commodity money , such as gold is money that has intrinsict value: it would be valued even if it were not used as money.

4. Fiat money such as paper dollars , is money without intrinsict value: it would be workless if it were not used as money

5. In the US economy, money takes the form of currency and various type of bank deposite such as checking acount

6. The federal reserve, the central bank of the US is responsible for regulating the US monetary system.

7. The fed chairman is appointed by the president and confirmed by congress every 4 years. Thechairman is the lead member of the federal open market commit, which meets about every 6 weeks to consider changes in monetery policy.

8. When banks loan out some of their deposite they increase the quantity of money in the economy. Because of this role run of banks is determining the money supply, the fed’s control of the money supply is imperfect.

SUMMARY

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monetary system ppt

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