Money and Banking Monetary Policy Prep PDF

Money and Banking History of money: - There once was no money - Before money, people had to barter ( trade something you had for something you needed) - Relied on the double coincidence of wants - Both people want something the other person has - First money...

Money and Banking History of money: - There once was no money - Before money, people had to barter ( trade something you had for something you needed) - Relied on the double coincidence of wants - Both people want something the other person has - First money wasnt coins or 4. Seeds of Resilience - Despite Nana’s cruelty, her warnings about the world prepare Mariam to endure hardships later in life. Her resilience, while born from trauma, allows her to find strength in protecting Laila and her children. - Impact on Mariam: Nana’s influence is paradoxical—though isolating and damaging, it indirectly equips Mariam with the fortitude to make her ultimate sacrifice. - Evidence: Mariam’s realization that her life had meaning through her bond with Laila and the children reflects the enduring impact of her early experiences. - paper - Cattle and livestock were used to purchase anything you want - Portability was tough, divisibility was tough, very hard to store - Moved from that to commodity money - The worth of money was valued by the intrinsic value of the commodity ( how much gold and silver etc.) - Fiat money ( what is used today) - Money has value because the government declares it legal tender, making it accepted as payment for goods, services, and debts. - There is a fallacy out there about the money supply and what % of the coinage and paper bills is the actual supply  - Everyone believes it is 100% but most of our money supply is just bank deposit money. - 7%-8% of the money supply is backed by bills and coins - 92-93% is just numbers on a comp screen - If everyone wanted all their money out of the bank only 7-8% would be given. Functions of Money : 1. Medium of exchange a. Generally accepted by everyone, solves the double coincidence of wants because everyone agrees to accept it 2. Measure of value a. Specific measures of value to see what an item worth is i. Does it well 3. Store of value a. You can save wealth, can pass it on from generation to generation b. Inflation chips away at your store value 4. The standard for future payments a. If money didn’t exist, we wouldn't have anything b. We are able to pay in increments c. Allows you to buy big ticket items and pay for them over time Double coincidence of wants: a situation where two parties each have something the other wants, and they agree to exchange these goods or services directly without the use of money. January 6, 2025, and January 7, 2025, * most of the marks on the quiz will be on this How Banks Create Money: Excess reserves (ER) - Amount of money left over in a bank that is not needed to meet regular demand - Regular demand → Meet the withdrawals, the average amount of withdrawals from all the members - Excess money the bank has, trying to make the best out of what they have. Reserve Ratio (R.R) - % of deposits kept in the bank - An amount that is chosen to keep in cash - For all banks in Canada lowest the baks would keep is about 7%, and some would keep up to 15% or 16% - Most believe you should keep at least 10% in the bank available. - Changed in the last five years, used to be that the government set a minimum rate, that they have to keep a certain amount. But now it can be as low as the banks want What do banks do with excess reserves:  1. Investing them 2. Give out loans (this specific lesson talks about this) - The bank can set the interest rate, setting the terms. - Loaning out is what banks love to do, the only way they are in control. - Always true when loaning an interest loan: - By tomorrow he is going to spend it - No one takes out a loan and doesn't send it - Because you are paying for it. Limited Bank System: there is a cash strain, someone does something irrational, and then the building of the money supply stops. 4 bank system ( 2-4 bank system on quiz or exam ) given a deposit, say reserve ratio and how much of a bank system it is. 100,000 dollar deposit in 4 bank limited system, all banks having a reserve ratio of 10% Asking for the amount of new deposits and amount of new money creation Write a good story to get extra marks. :p Excess reserves: Example 1 : $42,000 R.R is 12% 12/100=0.12 42,000 x 0.12 = 5040 42,000-5040 = 36,960 ER = 36,960 Example 2 : Deposit: 612,940 R.R.= 13.5% 0.135 x 612,940 = 82746.9 612,940-82746.9 = 530193.1 ER = 530193.1 TD CIBC RBC TD Christina deposits → Dilan deposits 90,000 Rus deposits 81,000 Devo deposits 72,900 100,000 dollars dollars. dollars, dollars. Reserve ration = 10% R.R. = 10% R.R. = 10% R.R = 10% This means there is Excess reserves are E.R. = 65, 610 dollars $90,00 dollars in excess going to be 81,000 E.R. of 72,900 ( subtract reserves dollars. to solve for E.R Nabil takes that and burns it all. Jacob takes out a loan of David takes out a alone Anna takes out a loan 90,000 dollars to buy for 81,000 dollars and and spends it on crack from Dilan steaks and spends it at Rus’s Auto. from Devo’s crack den football shops. - Christina would still have her 100,000 dollars, but in real dollar terms, when it got loaned out, the money exists, but Christina still has money. - REAL money that is someho w multipl ying Amount Of New Deposits: add all the deposits 343,900 dollars created through the initial deposit Amount Of New Money: New money = new deposits - initial deposit = 243,900 dollars - What would make it end, to stop the creation of money, by purchasing an import, start the creation of money in another banking system Multibank System: never a cash strain, the full extent of the creation of money has occurred New Deposits = Initial Deposit x 1/R.R. 100,000 x 1/ R.R = new money 100,000 x 1/0.1 = 1000000 New Money = New Deposit - Initial Deposit 10000000 - 100,000 = 900,000 If this were only true, the banking system would not work, what makes it work is the notion that the banks don't just MAKE money and that the opposite is true and happening at the same rate. ( When you withdraw ) Money is being created at a crazy rate, but every time you withdraw, there is lost money at the same extreme rate. The money is there for the bank to meet regular demand, when it's withdrawn, they have to take out of their own investments. This is why it all equals out.  A bunch of loans that are excess reserves, and then someone takes out money, you have money that is a part of the reserve ratio when the money is given, you aren't following the R.R. rule. Need to replenish usng the money that was given out, so call in loans and decrease them. The same spiralling that happens when you take out a loan happens when u withdraw it. Everytime you withdraw from a bank. The decrease to the money supply is much greater than the withdrawal itself. Multiplier effect Assumptions: * 1. Excess Reserves a. The assumption is that the bank is able to loan out all of its excess reserves. If no one is taking out a loan, no money is being created, so there is the assumption that banks are able to loan out all their money and want to i. A scenario where it would have trouble loaning money: 1. When there are high interest rates, no one wants to take out a loan 2. The banks want to loan out money, but they might not want to risk it during a depression in the business cycle, they don't know if they would be able to pay for it or not. They would use that money to invest instead but this doesn't have the spiral effect loaning does. a. There would be no creation of money 2. Cash Drains a. The creation of money is reliant on cash drains. i. Assumptions that there are no cash drains 1. Cash drains in this context: money that doesn't return to the banking system in that country. a. Cash drain would be when you spend on imports or irrational behaviour. United States VS. Canadian Banking System: Canadian Banking System: Branch Banking - Individual Banks have numerous branches that stretch across the country - Big six banks - CIBC - TD - RBC - BMO - SCOTIABANK - NATIONAL Advantages: - Convenient → can go to a bank all over the country - A high degree of security - Risk is spread out across the country - Security for all depositors - Won't have to worry if a certain branch has a low reserve ratio because they can go to any of the other branches and are willing to give that branch money if they return it. - Never been a major bank that has failed in Canada since the great depression Disadvantage: - There are oligopolies, so we are offered the same stuff everywhere, no specialization at all - Same identical rates - Extremely minor differences - Our banks are not competing United States Banking: Unit Banking - Progressing into becoming a middle ground of unit and branch banking - There are no multiple branches, there is just a bank for certain areas. No other infrastructure - Over 4000 different banks - There are some that have branches ( bank of America, JP Morgan Chase ) but not as many as Canada Advantage: - Specialization - Competition, there are better rates. Consumers win - Fighting for your business Disadvantage: - Lack of security - Since the great depression, there have been over 2000 that have filed bankruptcy because of unit banking - Lack of Convenience - Cannot have your bank everywhere, only in that specific spot We agree that there is security in branch banking in Canada, but now the security is being overshadowed by the branches, the government bringing in the CDIC ( Canadian deposit_ ) The CDIC will refund and replace in any account up to 100,000 dollars In the US, they have followed suit and most of the major or unit banks have a similar part of the government, where your deposits are insured.