2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 11. 2. In this chapter
you will learn. 11.1 The definition and functions of money. 11.2 What constitutes ...
Money and Banking
SLIDES PREPARED BY JUDITH SKUCE, GEORGIAN COLLEGE © 2005 McGraw-Hill Ryerson Ltd.
Macroeconomics, Chapter 11
1
In this chapter you will learn 11.1 The definition and functions of money 11.2 What constitutes the supply of money 11.3 What backs Canada’s money supply 11.4 The components of money demand 11.5 How the equilibrium interest rate is determined in the money market 11.6 About the structure of the Canadian financial system 11.7 About recent developments in money and banking © 2005 McGraw-Hill Ryerson Ltd.
Macroeconomics, Chapter 11
2
Chapter 11 Topics 11.1 The Definition & Functions of Money 11.2 The Supply of Money 11.3 What “Backs” the Money Supply? 11.4 The Demand for Money 11.5 Equilibrium in the Money Market 11.6 The Canadian Financial System 11.7 Recent Developments in Money & Banking
© 2005 McGraw-Hill Ryerson Ltd.
Macroeconomics, Chapter 11
3
The Definition & Functions of Money Money
is what money does
© 2005 McGraw-Hill Ryerson Ltd.
Macroeconomics, Chapter 11
4
The Definition & Functions of Money Medium
of exchange
© 2005 McGraw-Hill Ryerson Ltd.
Macroeconomics, Chapter 11
5
The Definition & Functions of Money Medium
of exchange Measure of value
© 2005 McGraw-Hill Ryerson Ltd.
Macroeconomics, Chapter 11
6
The Definition & Functions of Money Medium
of exchange Measure of value Store of value
© 2005 McGraw-Hill Ryerson Ltd.
Macroeconomics, Chapter 11
7
Chapter 11 Topics 11.1 The Definition & Functions of Money 11.2 The Supply of Money 11.3 What “Backs” the Money Supply? 11.4 The Demand for Money 11.5 Equilibrium in the Money Market 11.6 The Canadian Financial System 11.7 Recent Developments in Money & Banking
© 2005 McGraw-Hill Ryerson Ltd.
Macroeconomics, Chapter 11
8
The Supply of Money Table 11-1
Currency (coins & paper money) plus Demand deposits equals M1
December, 2002 © 2005 McGraw-Hill Ryerson Ltd.
M1 137.3
(billions of dollars) Macroeconomics, Chapter 11
9
The Supply of Money Currency:
Coins + Paper Money
• token money • Bank of Canada notes Demand
Deposits
• about ⅔ of M1 Institutions
That Offer Demand Deposits
• chartered banks are the primary depository institutions © 2005 McGraw-Hill Ryerson Ltd.
Macroeconomics, Chapter 11
10
The Supply of Money Near-monies
• nonchequable savings deposits • term deposits
© 2005 McGraw-Hill Ryerson Ltd.
Macroeconomics, Chapter 11
11
The Supply of Money Table 11-1
Currency (coins & paper money) M1 plus Demand deposits 137.3 equals M1 plus Personal savings deposits, plus Non-personal notice deposits equals M2
M2
559.8
December, 2002 © 2005 McGraw-Hill Ryerson Ltd.
(billions of dollars) Macroeconomics, Chapter 11
12
The Supply of Money M2+
is M2 plus
• deposits at trust & mortgage loan companies • deposits at caisses populaires & credit unions & other non-bank deposit-taking institutions • money market mutual funds
© 2005 McGraw-Hill Ryerson Ltd.
Macroeconomics, Chapter 11
13
The Supply of Money Table 11-1
Currency (coins & paper money) M1 plus Demand deposits 137.3 equals M1 plus Personal savings deposits, plus Nonpersonal notice deposits equals M2 plus Deposits: Other intermediaries
M2 M2+
559.8
equals M2+
801.8 December, 2002 © 2005 McGraw-Hill Ryerson Ltd.
(billions of dollars) Macroeconomics, Chapter 11
14
The Supply of Money we
will use the narrow M1 definition of money, unless stated otherwise
© 2005 McGraw-Hill Ryerson Ltd.
Macroeconomics, Chapter 11
15
Chapter 11 Topics 11.1 The Definition & Functions of Money 11.2 The Supply of Money 11.3 What “Backs” the Money Supply? 11.4 The Demand for Money 11.5 Equilibrium in the Money Market 11.6 The Canadian Financial System 11.7 Recent Developments in Money & Banking
© 2005 McGraw-Hill Ryerson Ltd.
Macroeconomics, Chapter 11
16
What “Backs” the Money Supply? Money
as Debt Value of Money • Acceptability • Legal Tender • Relative Scarcity
© 2005 McGraw-Hill Ryerson Ltd.
Macroeconomics, Chapter 11
17
What “Backs” the Money Supply? Money
& Prices
NOTES:
Reciprocal relationship • The Purchasing Power of the the Dollar between price level and the value of the dollar
D
© 2005 McGraw-Hill Ryerson Ltd.
=
1
P
Macroeconomics, Chapter 11
18
What “Backs” the Money Supply? Money
& Prices
• The Purchasing Power of the Dollar • Inflation & Acceptability
© 2005 McGraw-Hill Ryerson Ltd.
Macroeconomics, Chapter 11
19
Chapter 11 Topics 11.1 The Definition & Functions of Money 11.2 The Supply of Money 11.3 What “Backs” the Money Supply? 11.4 The Demand for Money 11.5 Equilibrium in the Money Market 11.6 The Canadian Financial System 11.7 Recent Developments in Money & Banking
© 2005 McGraw-Hill Ryerson Ltd.
Macroeconomics, Chapter 11
20
The Demand for Money Transactions
Demand, Dt
• demand for money as a medium of exchange • varies directly with GDP Asset
Demand, Da
• demand for money as a store of value • varies inversely with the interest rate
© 2005 McGraw-Hill Ryerson Ltd.
Macroeconomics, Chapter 11
21
The Demand For Money Figure 11-1
Transactions Demand, Dt Interest Rate
i%
+
10 7.5 5 2.5
Dt 0
0 50 100 150 200 250 300
Amount of money demanded (billions of dollars)
© 2005 McGraw-Hill Ryerson Ltd.
Macroeconomics, Chapter 11
22
The Demand For Money Figure 11-1
Transactions Demand, Dt Interest Rate
i%
+
Asset Demand, Da
i%
10
10
7.5
7.5
5
5
2.5
2.5
Dt 0
=
0 50 100 150 200 250 300
0
Da 0 50 100 150 200 250 300
Amount of money demanded (billions of dollars)
© 2005 McGraw-Hill Ryerson Ltd.
Amount of money demanded (billions of dollars)
Macroeconomics, Chapter 11
23
The Demand For Money Figure 11-1
Transactions Demand, Dt Interest Rate
i%
+
Asset Demand, Da
=
i%
Total demand for money, Dm
i%
10
10
10
7.5
7.5
7.5
5
5
5
2.5
2.5
2.5
Dt 0
0 50 100 150 200 250 300
0
Da 0 50 100 150 200 250 300
Amount of money demanded (billions of dollars)
Amount of money demanded (billions of dollars)
0
Dm 0 50 100 150 200 250 300
Amount of money demanded (billions of dollars)
100 + 100 = 200 © 2005 McGraw-Hill Ryerson Ltd.
Macroeconomics, Chapter 11
24
Chapter 11 Topics 11.1 The Definition & Functions of Money 11.2 The Supply of Money 11.3 What “Backs” the Money Supply? 11.4 The Demand for Money 11.5 Equilibrium in the Money Market 11.6 The Canadian Financial System 11.7 Recent Developments in Money & Banking
© 2005 McGraw-Hill Ryerson Ltd.
Macroeconomics, Chapter 11
25
Equilibrium in the Money Market demand
for money combined with supply of money portrays the money market
© 2005 McGraw-Hill Ryerson Ltd.
Macroeconomics, Chapter 11
26
The Demand For Money Figure 11-1
Transactions Demand, Dt Interest Rate
i%
=
i%
10
Total demand for money, Dm
i% 10
10
7.5
ADD THE 7.5 MONEY SUPPLY 5 5 TO FIND THE 2.5 2.5 EQUILIBRIUMDaRATE 0 0 OF INTEREST 0 50 100 150 200 250 300 7.5
5 2.5
Dt 0
+
Asset Demand, Da
0 50 100 150 200 250 300
0 50 100 150 200 250 300
Amount of money demanded (billions of dollars)
© 2005 McGraw-Hill Ryerson Ltd.
Dm
Amount of money demanded (billions of dollars)
Amount of money demanded (billions of dollars)
Macroeconomics, Chapter 11
27
The Demand For Money Figure 11-1
Transactions Demand, Dt Interest Rate
i%
+
Asset Demand, Da
=
i%
Total demand for money, Dm
i%
10
10
10
7.5
7.5
7.5
5
5
5
2.5
2.5
2.5
Dt 0
0 50 100 150 200 250 300
Amount of money demanded (billions of dollars)
0
Da 0 50 100 150 200 250 300
Amount of money demanded (billions of dollars)
Equilibrium Interest Rate
© 2005 McGraw-Hill Ryerson Ltd.
0
Sm
ie Dm 0 50 100 150 200 250 300
Amount of money demanded (billions of dollars)
Macroeconomics, Chapter 11
28
Adjustment to a Decline in the Money Supply A
decline in the supply of money will create a temporary shortage of money & increase the equilibrium interest rate
© 2005 McGraw-Hill Ryerson Ltd.
Macroeconomics, Chapter 11
29
The Money Market Rate of interest, i (percent)
Figure 11-2
Sm 10 7.5
ie
5
Suppose the money supply is decreased from $200 billion, Sm, to $150 billion Sm1
Dm
2.5
0 0
50
100
150
200
250
300
Amount of money demanded (billions of dollars) © 2005 McGraw-Hill Ryerson Ltd.
Macroeconomics, Chapter 11
30
The Money Market Rate of interest, i (percent)
Figure 11-2
Sm1
Sm A temporary shortage of money will require the sale of some assets to meet the need
10 7.5
ie
5
Dm
2.5
0 0
50
100
150
200
250
300
Amount of money demanded (billions of dollars) © 2005 McGraw-Hill Ryerson Ltd.
Macroeconomics, Chapter 11
31
The Money Market Rate of interest, i (percent)
Figure 11-2
Sm1
Sm
A temporary shortage of money will require the sale of some assets sellsto meet the need
10
Everyone bonds ie 5 bond prices fall 2.5interest rates riseDm illustrated… 7.5
0 0
50
100
150
200
250
300
Amount of money demanded (billions of dollars) © 2005 McGraw-Hill Ryerson Ltd.
Macroeconomics, Chapter 11
32
Bonds a
$1,000 bond @ 5% pays $50 annually if you buy this bond for $667, you still receive $50 annually the lower the what is your effective bondinterest price,rate? 50/667=7.5% the higher the
interest rate
© 2005 McGraw-Hill Ryerson Ltd.
Macroeconomics, Chapter 11
33
The Money Market Rate of interest, i (percent)
Figure 11-2
Sm1
Sm
A temporary shortage 10 of money will require Everyone sells bonds the sale of some assets 7.5 to meet the need bond prices fall
ie 5 interest rates rise
until people are happy 2.5 holding the lower Dm quantity of money 0 0
50
100
150
200
250
300
Amount of money demanded (billions of dollars) © 2005 McGraw-Hill Ryerson Ltd.
Macroeconomics, Chapter 11
34
The Money Market Rate of interest, i (percent)
Figure 11-2
Sm1
Sm After adjustments to asset holdings, a new equilibrium will be seen at a higher level of interest
10
ie
7.5 5
Dm
2.5
0 0
50
100
150
200
250
300
Amount of money demanded (billions of dollars) © 2005 McGraw-Hill Ryerson Ltd.
Macroeconomics, Chapter 11
35
Adjustment to an Increase in the Money Supply An
increase in the supply of money will create a temporary surplus of money & decrease the equilibrium interest rate
© 2005 McGraw-Hill Ryerson Ltd.
Macroeconomics, Chapter 11
36
The Money Market Rate of interest, i (percent)
Figure 11-2
Sm Suppose the money supply is increased from $200 billion, Sm1, to ie $250 billion Sm2
10 7.5 5
Dm
2.5
0 0
50
100
150
200
250
300
Amount of money demanded (billions of dollars) © 2005 McGraw-Hill Ryerson Ltd.
Macroeconomics, Chapter 11
37
The Money Market Rate of interest, i (percent)
Figure 11-2
SmSm2
A temporary surplus of money will require the purchase of some assets to meet the desired level of liquidity
10 7.5 5
Dm
2.5
0 0
50
100
150
200
250
300
Amount of money demanded (billions of dollars) © 2005 McGraw-Hill Ryerson Ltd.
Macroeconomics, Chapter 11
38
Bonds a
$1,000 bond @ 5% pays $50 annually if you buy this bond for $2000, you still receive $50 annually the higher the what is your effective bondinterest price,rate? 50/2000=2.5% the lower the
interest rate
© 2005 McGraw-Hill Ryerson Ltd.
Macroeconomics, Chapter 11
39
The Money Market Rate of interest, i (percent)
Figure 11-2
SmSm2
A temporary surplus of money 10 require Everyone buys bondsthewill purchase of 7.5 bond prices rise some assets to meet the desired 5 interest rates fall level of liquidity
until people are happy 2.5 holding the higher Dm quantity of money 0 0
50
100
150
200
250
300
Amount of money demanded (billions of dollars) © 2005 McGraw-Hill Ryerson Ltd.
Macroeconomics, Chapter 11
40
The Money Market Rate of interest, i (percent)
Figure 11-2
After SmSm2 adjustments to asset holdings, a new equilibrium will be seen at a lower level of interest
10 7.5 5 2.5
ie
Dm
0 0
50
100
150
200
250
300
Amount of money demanded (billions of dollars) © 2005 McGraw-Hill Ryerson Ltd.
Macroeconomics, Chapter 11
41
Chapter 11 Topics 11.1 The Definition & Functions of Money 11.2 The Supply of Money 11.3 What “Backs” the Money Supply? 11.4 The Demand for Money 11.5 Equilibrium in the Money Market 11.6 The Canadian Financial System 11.7 Recent Developments in Money & Banking
© 2005 McGraw-Hill Ryerson Ltd.
Macroeconomics, Chapter 11
42
The Canadian Financial System The
Evolution of the Canadian Banking System • 2003 – 16 domestically owned banks – 33 foreign bank subsidiaries – 20 foreign bank branches
• big six banks have 90% of total banking assets & 75% of payments volume • mergers may lead to more concentration © 2005 McGraw-Hill Ryerson Ltd.
Macroeconomics, Chapter 11
43
Table 11-2 The Balance Sheet of Canadian Chartered Banks December 2002 ($ Billions) Assets Liabilities Reserves Loans
0.5 Demand deposits
97.2
688.8 Savings deposits
131.1
Gov’t. of Canada securities
76.7 Term deposits
Foreign-currency assets
40.0 Foreign-currency liabilities
Gov’t of Canada Other Total
235.1 Other 1,041.1 Total
© 2005 McGraw-Hill Ryerson Ltd.
Macroeconomics, Chapter 11
240.9 76.9
2.0 493.0 1.041.1 44
GLOBAL PERSPECTIVE 11.1 Assets (Canadian $ billions, 2002) Mizuho Holdings (Japan) $1,876,772 Citigroup (U.S.) 1,674,750 Sumitomo Mitsui (Japan) Deutsche Bank (Germany)
1,338,400 1,288,926
Mitsubishi Tokyo (Japan) Royal Bank of Canada Canadian Imperial Bank of Commerce TD Canada Trust Scotiabank Bank of Montreal National Bank of Canada
1,196,957 351,042 280,447 279,788 276,162 232,362 72,447
© 2005 McGraw-Hill Ryerson Ltd.
Macroeconomics, Chapter 11
45
The Canadian Financial System Canada’s
Chartered Banks
• fractional reserve system Making
Loans Other Financial Intermediaries Cheque Clearing
© 2005 McGraw-Hill Ryerson Ltd.
Macroeconomics, Chapter 11
46
Chapter 11 Topics 11.1 The Definition & Functions of Money 11.2 The Supply of Money 11.3 What “Backs” the Money Supply? 11.4 The Demand for Money 11.5 Equilibrium in the Money Market 11.6 The Canadian Financial System 11.7 Recent Developments in Money & Banking
© 2005 McGraw-Hill Ryerson Ltd.
Macroeconomics, Chapter 11
47
Recent Developments in Money & Banking Expansion
• • • •
of Services
new products minibanks ABMs debit cards, phone banking, Internet banking
© 2005 McGraw-Hill Ryerson Ltd.
Macroeconomics, Chapter 11
48
Recent Developments in Money & Banking Expansion
of Services Globalization of Financial Markets
© 2005 McGraw-Hill Ryerson Ltd.
Macroeconomics, Chapter 11
49
Recent Developments in Money & Banking Expansion
of Services Globalization of Financial Markets Electronic Transactions
© 2005 McGraw-Hill Ryerson Ltd.
Macroeconomics, Chapter 11
50
Chapter 11 Topics 11.1 The Definition & Functions of Money 11.2 The Supply of Money 11.3 What “Backs” the Money Supply? 11.4 The Demand for Money 11.5 Equilibrium in the Money Market 11.6 The Canadian Financial System 11.7 Recent Developments in Money & Banking
© 2005 McGraw-Hill Ryerson Ltd.
Macroeconomics, Chapter 11
51