ECO 285 Money & Banking Basics II

1. ECO 285Money & BankingBasics II ECO 285 – Spring 2014 – Dr. D. Foster

2. Measurement Liquidity – How fast, at full market value an asset can be converted into a means of payment. • How? - Liquidity of financial assets. • M1 = [Coins and] currency in circulation (C) + “transactions deposits” (D) + TC • M2 = M1 + (time deposits)S + MMMFIndividual • M3 = M2 + TDL + MMMFInstitutional + Euro$ + RP Cash – perfectly liquid Diamond ring – not liquid Money – only interested in financial assets

3. What Banks Look Like Reserves(Cash in vault) T-Bills(Liquid assets) Loans(Earning assets) Assets Liabilities & Equity Demand Deposits (Checking Accounts) Equity M1 Accounting Identity: A  L + E

4. The Monetary Base • Monetary Base (MB) = C + bank reserves (R) • Federal Reserve has perfect control over MB: • Prints currency. • All reserves are currency or deposits at the Fed. • The Federal Reserve has less control over M1, M2. • MB plays a role in the government’s budget:G = T + Bonds + MB

5. Monetary Data – Travelers Checks

6. Monetary Data - Currency

7. Monetary Data - Checking

8. Monetary Data – Other Accts.

9. Monetary Data – M1, M2, MZM

10. Monetary Data - % in M’s

11. Monetary Data - MB

12. Monetary Data – Excess Res.

13. Monetary Data – Excess Res.

14. Need a National Currency? Dollarization - Use another country’s currency as your medium of exchange. $ - Ecuador, El Salvador, Timor, British Virgin Islands, Panama € - Vatican City, Monaco, Andorra Currency board- the national currency is backed by an equal amount of a foreign currency. $ - Hong Kong, Bermuda, East Caribbean $ € - Bulgaria, Estonia, Lithuania Currency union - A group of countries adopt a common currency. Euro/West Africa/Caribbean

15. ECO 285Money & BankingBasics II ECO 285 – Spring 2014 – Dr. D. Foster