Money and modern banking

Money and modern bankingMoney and modern banking

22

JOIN KHALID AZIZJOIN KHALID AZIZ

FRESH CLASSES OF CA FRESH CLASSES OF CA MODULE B & ICMAP MODULE B & ICMAP STAGE 1 ECONOMICSSTAGE 1 ECONOMICS

FROM 18FROM 18THTH JULY 2011 JULY 2011

33

JOIN KHALID AZIZJOIN KHALID AZIZ ECONOMICS OF ICMAP, ICAP, MA-ECONOMICS, ECONOMICS OF ICMAP, ICAP, MA-ECONOMICS,

B.COM.B.COM. FINANCIAL ACCOUNTING OF ICMAP STAGE 1,3,4 FINANCIAL ACCOUNTING OF ICMAP STAGE 1,3,4

ICAP MODULE B, B.COM, BBA, MBA & PIPFA.ICAP MODULE B, B.COM, BBA, MBA & PIPFA. COST ACCOUNTING OF ICMAP STAGE 2,3 ICAP COST ACCOUNTING OF ICMAP STAGE 2,3 ICAP

MODULE D, BBA, MBA & PIPFA.MODULE D, BBA, MBA & PIPFA.

CONTACT:CONTACT: 0322-33857520322-3385752 0312-23028700312-2302870 0300-25408270300-2540827 R-1173,ALNOOR SOCIETY, BLOCK 19,F.B.AREA, R-1173,ALNOOR SOCIETY, BLOCK 19,F.B.AREA,

KARACHI, PAKISTAN.KARACHI, PAKISTAN.

44

Some key questionsSome key questions

Why does society need money?Why does society need money? Why do governments wish to influence money Why do governments wish to influence money

supply?supply? How do financial markets interact with the How do financial markets interact with the

“real” economy?“real” economy? What is the relationship between money and What is the relationship between money and

interest rates?interest rates?

55

MoneyMoney

Any generally accepted means of payment for Any generally accepted means of payment for delivery of goods or the settlement of debtdelivery of goods or the settlement of debt

Legal moneyLegal money notes and coinsnotes and coins

Token moneyToken money means of payment whose value or purchasing means of payment whose value or purchasing

power as money greatly exceeds its cost of power as money greatly exceeds its cost of productionproduction

66

Money and its functionsMoney and its functions

Medium of exchangeMedium of exchange money provides a medium for the exchange of goods and services money provides a medium for the exchange of goods and services

which is more efficient than barterwhich is more efficient than barter

Unit of accountUnit of account a unit in which prices are quoted and accounts are kepta unit in which prices are quoted and accounts are kept

Store of valueStore of value money can be used to make purchases in the futuremoney can be used to make purchases in the future

Standard of deferred paymentStandard of deferred payment a unit of account over time: this enables borrowing and lendinga unit of account over time: this enables borrowing and lending

77

A firm’s balance sheetAssets

–what the firm or households owns

Liabilities

–what the firm or households owes

Balance sheet

–lists a firm’s assets and liabilities at a point in time

88

Suppose A has 100 TL of money and a carSuppose A has 100 TL of money and a car His assets are cash and the car that he ownsHis assets are cash and the car that he owns

B has 250 cash B has 250 cash B’s asset is only cash B’s asset is only cash

If A sells the car to B with its market value of 150 in If A sells the car to B with its market value of 150 in cash cash A’s assets become 100 + 150 A’s assets become 100 + 150 B’s assets become 100 + carB’s assets become 100 + car

Now B owns the car so car is B’s fixed asset together with the Now B owns the car so car is B’s fixed asset together with the remaining cash of 100 remaining cash of 100

99

Consider only liquid assets moneyConsider only liquid assets money A has 100 money A has 100 money Assets of A = 100 + other assetsAssets of A = 100 + other assets B has 250 moneyB has 250 money Assets of B = 250 + other assetsAssets of B = 250 + other assets

B lends 150 TL of money to A to be paid back after one month B lends 150 TL of money to A to be paid back after one month laterlater

What are the new assets of AWhat are the new assets of A Assets of A= 100+150+othersAssets of A= 100+150+others What are the liabilities of AWhat are the liabilities of A Liabilities are part of the assets that are claimed by other Liabilities are part of the assets that are claimed by other

parties parties In this example B lends 150 to A so this 150 is a liability of A In this example B lends 150 to A so this 150 is a liability of A

to B to B

1010

It is claimed by B It is claimed by B Liabilities of A = 150: A’s debt to be paid to B in next monthLiabilities of A = 150: A’s debt to be paid to B in next month What are B’s assets ?What are B’s assets ? Assets of B=100 (cash) + 150 (loans to A) + othersAssets of B=100 (cash) + 150 (loans to A) + others Total assets = assets of A + assets of BTotal assets = assets of A + assets of B = 100+150+oth.+ 100+150+oth.= 100+150+oth.+ 100+150+oth. Total liabilities= liab of A + liab of BTotal liabilities= liab of A + liab of B = 150 + 0 =150= 150 + 0 =150

1111

100+Oth.

250+Othe.

A B

B lends 150 to A

100+150+oth

100+150+Othe.

AB

1212

Modern bankingModern banking

A financial intermediaryA financial intermediary an institution that specializes in bringing lenders and an institution that specializes in bringing lenders and

borrowers togetherborrowers together e.g. a commercial bank, which has a government licence to make e.g. a commercial bank, which has a government licence to make

loans and issue depositsloans and issue deposits including deposits against which cheques can be writtenincluding deposits against which cheques can be written

pays interest to the lenders or depositorspays interest to the lenders or depositors but charges higher interests to the borrowers when but charges higher interests to the borrowers when

landing money landing money makes profit by the interest differential between the makes profit by the interest differential between the

landing and borrowing rateslanding and borrowing rates

1313

Money creation by banksMoney creation by bankstime=0time=0

Depositing money to a bank:Depositing money to a bank: there are four households A, B,C,D each having 30m there are four households A, B,C,D each having 30m

TL in their pocketsTL in their pockets total number of banknotes = 4*30m=120mtotal number of banknotes = 4*30m=120m Total (financial) assets of the 4 households = Total (financial) assets of the 4 households =

4*30m=120m4*30m=120m money in circulation =4*30=120money in circulation =4*30=120

1414

Time=1Time=1 Each of them decides to deposit 25m to a bank Each of them decides to deposit 25m to a bank then total amount of deposits =4*25=100mthen total amount of deposits =4*25=100m Banks assets increases by 100 at the same time Banks assets increases by 100 at the same time

liabilities increases by 100liabilities increases by 100 as the 100m deposited to the bank is claimed by the as the 100m deposited to the bank is claimed by the

depositors households so bank is liable for this money to depositors households so bank is liable for this money to depositorsdepositors

money in circulation = 20money in circulation = 20 money deposited = 100money deposited = 100 total tokens or notes =120total tokens or notes =120

1515

Depositors can withdraw all or some portion of the Depositors can withdraw all or some portion of the money any time they likemoney any time they like

after depositing total money stock does not changeafter depositing total money stock does not change 4*54*5 + + 4*254*25 = 120 = 120

cashcash depositsdeposits in their pocket in their pocket

total liabilities of the bank to households:total liabilities of the bank to households: 4*25 = 100 4*25 = 100 banks assets = 100 = liabilitiesbanks assets = 100 = liabilities

1616

The first bank loanThe first bank loantime=2time=2

A firm F may come and ask for a loan from the bank A firm F may come and ask for a loan from the bank so as to pay it back in future with a reasonable so as to pay it back in future with a reasonable interest interest

So bank accepts this offer because at the time of the So bank accepts this offer because at the time of the payment the bank will earn more due the the interest payment the bank will earn more due the the interest it earnsit earns

Bank gives a loan of 40 to the firm F Bank gives a loan of 40 to the firm F taking the risk of all depositors requesting their money taking the risk of all depositors requesting their money

before the firm pays its debt backbefore the firm pays its debt back

1717

What are assets and liabilities of the bank after What are assets and liabilities of the bank after lending the money to Flending the money to F

total assets:total assets: 60 + 40 = 10060 + 40 = 100

money loansmoney loans in bank to firm Fin bank to firm F

total liabilities to householdstotal liabilities to households 4*25 = 1004*25 = 100

householdshouseholds loans loans

1818

Now firm F is also liable to the bank 40m TL and bank’s Now firm F is also liable to the bank 40m TL and bank’s liability to households does not changeliability to households does not change

money in circulation = 20 + 40 = 60 money in circulation = 20 + 40 = 60 money remaining in the bank as notes = 60money remaining in the bank as notes = 60 total amount of notes (tokens) = 60+60=120total amount of notes (tokens) = 60+60=120 does not change does not change notice that notice that total deposits + money in circulation=total deposits + money in circulation=

100 + 20 +40 = 160 100 + 20 +40 = 160 increases as a result of bank’s loan to firm Fincreases as a result of bank’s loan to firm F

1919

Time=3Time=3

Firm F buy a track of value 40m TL from firm G in Firm F buy a track of value 40m TL from firm G in cash cash

so the 40m TL transfers to firm Gso the 40m TL transfers to firm G but firm G deposits 30m TL of that money to the but firm G deposits 30m TL of that money to the

bank againbank again Total deposits in the bank:Total deposits in the bank: 4*25 + 30 = 130 4*25 + 30 = 130

liabilities liabilities liabilities liabilities to households to firm Gto households to firm G

2020

Total assets of the bank:Total assets of the bank: 60 + 30 + 40 = 13060 + 30 + 40 = 130

cash from cash from loan tocash from cash from loan to households firm G to firm Fhouseholds firm G to firm F

assets of the bank = liabilities of the bank to four households assets of the bank = liabilities of the bank to four households and to firm Gand to firm G

Total amount of banknotes in the economyTotal amount of banknotes in the economy 4*5 + 104*5 + 10 + 90 = 120 + 90 = 120

money in money in money in money in circulation the bankcirculation the bank

2121

Deposits + money in circulation=Deposits + money in circulation= 130 10+20 = 160130 10+20 = 160

2222

__________________ Bank Bank ____ ____public_____public_____ liabilities assets money in pocketsliabilities assets money in pockets time deposits time deposits cash loanscash loans A.B,C,D F G A.B,C,D F G 0 0 0 0 120 00 0 0 0 120 0 1 100 100 0 20 01 100 100 0 20 0 2 100 60 40 20 402 100 60 40 20 40 2 100 60 40 20 0 402 100 60 40 20 0 40 3 130 90 40 20 0 103 130 90 40 20 0 10

2323

Reserves and reserve ratioReserves and reserve ratio

Commercial banks need to hold only a proportion Commercial banks need to hold only a proportion of assets as cash reservesof assets as cash reserves

reserves = deposits - loansreserves = deposits - loans reserve ratio= reserve ratio= reserves in the bank/total depositsreserves in the bank/total deposits

this enables them to create credit by lendingthis enables them to create credit by lending the lower the reserve ratio the more the bank is the lower the reserve ratio the more the bank is

landing landing interest revenues will be higherinterest revenues will be higher a greater risk of being unable to meet the a greater risk of being unable to meet the

creditor’s claims of their depositscreditor’s claims of their deposits

2424

Bank Bank liabilities assetsliabilities assets time deposits reserves loans reserve ratiotime deposits reserves loans reserve ratio 0 0 0 00 0 0 0 1 100 100 0 100/100=11 100 100 0 100/100=1 2 100 60 40 60/100=0.62 100 60 40 60/100=0.6 2 100 60 40 60/100=0.62 100 60 40 60/100=0.6 3 130 90 40 90/130=0.693 130 90 40 90/130=0.69

2525

Financial panicsFinancial panics

Financial panics isFinancial panics is people believe that the bank will be unable to pay. people believe that the bank will be unable to pay. In the stampede to get their money out, they ensure that the In the stampede to get their money out, they ensure that the

bank can not pay. bank can not pay. It will go bankruptIt will go bankrupt

2626

Money supplyMoney supply

Money SupplyMoney Supply the money supply is the value of the total stock of the money supply is the value of the total stock of

moneymoney money supply = money in circulation + deposits at the bankmoney supply = money in circulation + deposits at the bank

for the bankfor the bank assets = liabilitiesassets = liabilities assets = money in the bank + value of loansassets = money in the bank + value of loans

money supply = money in circulationmoney supply = money in circulation + money at the bank(reserves)+ money at the bank(reserves) + bank’s loans+ bank’s loans

2727







2828

Total banknotes=money in circulationTotal banknotes=money in circulation +money in the bank(reserves)+money in the bank(reserves) note that total value of token money = value of banknotes < note that total value of token money = value of banknotes <

money supplymoney supply money supply = money supply = value of banknotes + bank loansvalue of banknotes + bank loans

2929

Bank publicBank public liabilities assets money moneyliabilities assets money money time deposits cash loans in circulation supplytime deposits cash loans in circulation supply

0 0 0 0 120 1200 0 0 0 120 120 1 100 100 0 20 1201 100 100 0 20 120 2 100 60 40 60 1602 100 60 40 60 160 2 100 60 40 60 1602 100 60 40 60 160 3 130 90 40 30 1603 130 90 40 30 160

3030

A beginner’s guide to the financial marketsA beginner’s guide to the financial markets

Financial assetFinancial asset a piece of paper entitling the owner to a specified stream a piece of paper entitling the owner to a specified stream

of interest payments over a specified periodof interest payments over a specified period CashCash

Notes and coin, paying no interestNotes and coin, paying no interest the most liquid of all assets.the most liquid of all assets.

BillsBills financial assets with less than one year until the known financial assets with less than one year until the known

date at which they will be repurchased by the original date at which they will be repurchased by the original ownerowner

highly liquidhighly liquid

3131

A beginner’s guide to the financial marketsA beginner’s guide to the financial markets(continued)(continued)

BondsBonds longer term financial assets – less liquid because there is more longer term financial assets – less liquid because there is more

uncertainty about the future income streamuncertainty about the future income stream

Industrial shares (equities)Industrial shares (equities) entitlements to receive corporate dividendsentitlements to receive corporate dividends not very liquidnot very liquid

3232

Assets of banks:Assets of banks: in foreign currencyin foreign currency

cashcash securitiessecurities loansloans

in TLin TL cashcash securitiessecurities loansloans

3333

Cash reservesCash reserves banks has to hold part of deposits as cash by low banks has to hold part of deposits as cash by low

and to satisfy depositors demandsand to satisfy depositors demands Loans Loans

principal asset of banks and the essential part of principal asset of banks and the essential part of their businesstheir business

3434

LiquidityLiquidity refers to the speed and certainty with which an refers to the speed and certainty with which an

asset can be converted back in to moneyasset can be converted back in to money money is the most liquid asset of all money is the most liquid asset of all

the other main asset of banks is securitiesthe other main asset of banks is securities loan for which a second hand market exists loan for which a second hand market exists trade is carried out all the timetrade is carried out all the time

3535

Liabilities of banksLiabilities of banks sight and time depositssight and time deposits sight deposits: the depositor can withdraw money sight deposits: the depositor can withdraw money

without any noticewithout any notice chequing accounts are sight depositschequing accounts are sight deposits

time deposits pay higher interest rates, money is time deposits pay higher interest rates, money is tied for a designated period of timetied for a designated period of time

if the money were withdrawn before the maturity if the money were withdrawn before the maturity date the high interest rate is lostdate the high interest rate is lost

3636

The monetary base and the money The monetary base and the money multipliermultiplier

The monetary base or stock of high-The monetary base or stock of high-powered moneypowered money the quantity of notes and coin in private the quantity of notes and coin in private

circulation plus the quantity held by the circulation plus the quantity held by the banking systembanking system

H: high powered moneyH: high powered money R: quantity held by the banking systemR: quantity held by the banking system C: quantity of notes and coins in circulationC: quantity of notes and coins in circulation

3737

Credit creation by banksCredit creation by banks

EXAMPLE:EXAMPLE: initial positions:initial positions: money supply M= 1100money supply M= 1100 deposits=deposits= suppose the private sector deposits all of the extra cash it suppose the private sector deposits all of the extra cash it

gets gets and the commercial bank maintains a 10% cash reserve and the commercial bank maintains a 10% cash reserve

ratioratio Suppose central bank issues 100m TL of new banknote and Suppose central bank issues 100m TL of new banknote and

distributes it to public distributes it to public What is the total increase in money supply as a result of the What is the total increase in money supply as a result of the

injection of the new 10m TL in to the economy?injection of the new 10m TL in to the economy?

3838

Step 1Step 1 Step 1a: Public deposits %100 of the money which is 100m Step 1a: Public deposits %100 of the money which is 100m

TL to the bank(s)TL to the bank(s) notes in circulation does not changenotes in circulation does not change

Step 1b: Bank lent 90% of the new deposits as new loansStep 1b: Bank lent 90% of the new deposits as new loans loans increase by 0.9*100=90 loans increase by 0.9*100=90

Changes in quantities areChanges in quantities are Banks PublicBanks Public Assets LiabilitiesAssets Liabilities reserves loans reserves loans D D C C M M

0 100 1000 1100 0 1100 0 100 1000 1100 0 1100 0 +100 0 +100 +100 +100 1a +100 0 +100 -100 1a +100 0 +100 -100 1b -90 +90 +90 +901b -90 +90 +90 +90 +10 +90 +100 +90 +190 +10 +90 +100 +90 +190 1 1 110 1090 1200 +90 1290 110 1090 1200 +90 1290

3939

Step 2Step 2 Step 2a: Public depositsall of the new loans to the Step 2a: Public depositsall of the new loans to the

bank(s) bank(s) deposits increases by 90deposits increases by 90

Step 1b: Bank lent 90% of the new deposits (81) as Step 1b: Bank lent 90% of the new deposits (81) as new loansnew loans loans increase by 0.9*90=81loans increase by 0.9*90=81

Changes in quantities areChanges in quantities are Banks PublicBanks Public Assets Liabilities changes inAssets Liabilities changes in reserves loans reserves loans D D C C M M

1 1 110 1090 1200 90 1290110 1090 1200 90 1290 2a +90 +90 -902a +90 +90 -90 2b -81 +81 +81 2b -81 +81 +81 +9 +81 +90 -9 +81+9 +81 +90 -9 +81 2 119 1181 1290 81 1381 2 119 1181 1290 81 1381

4040

Step 3Step 3 Step 3a: Public deposits all of the new loans to the Step 3a: Public deposits all of the new loans to the

bank(s) bank(s) deposits increases by 81deposits increases by 81

Step 1b: Bank lent 90% of the new deposits (81) as new Step 1b: Bank lent 90% of the new deposits (81) as new loansloans loans increase by 0.9*81=72.9loans increase by 0.9*81=72.9

Changes in quantities areChanges in quantities are Banks PublicBanks Public Assets Liabilities changes inAssets Liabilities changes in reserves loans reserves loans D D C C M M

2 119 1181 1290 81 1381 2 119 1181 1290 81 1381 3a +81 +81 -81 3a +81 +81 -81 3b -72.9 +72.9 +72.9 3b -72.9 +72.9 +72.9 8.1 +72.9 +81 -8.1 +72.98.1 +72.9 +81 -8.1 +72.9 3 127.1 1253.9 1371 72.9 1453.93 127.1 1253.9 1371 72.9 1453.9

4141

Notice that each step starts with tthe public Notice that each step starts with tthe public sector’s depositing all of its money in to bankssector’s depositing all of its money in to banks

then assets of the banks increases at the same then assets of the banks increases at the same time liabilities are increases by the same time liabilities are increases by the same amountamount

in the second round of each step banks lend in the second round of each step banks lend %90 of their new assets as loans to private %90 of their new assets as loans to private sector which inject money in to public againsector which inject money in to public again

4242

Summary of the stepsSummary of the steps

Changes in quantities areChanges in quantities are D D C C M M H H

0 +100.00 +100.000 +100.00 +100.00

1 +100 +90 +190 1 +100 +90 +190 2 +90 -9 +812 +90 -9 +81 3 +81 - 8.1 +72.93 +81 - 8.1 +72.9 notice that when H increased by 100notice that when H increased by 100 M the money supply increases much more than thatM the money supply increases much more than that M = 100+90+81 +72.9+...M = 100+90+81 +72.9+... =100*(1 +0.9+0.9=100*(1 +0.9+0.922+0.9+0.933+...)+...) =100 .=100 . 1 . 1 . = 1000 = 1000

1-0.91-0.9

4343

Why people hold cash?Why people hold cash? Some purchases are made using notes or coins. Some purchases are made using notes or coins.

Instead of using credit cards or writing chequesInstead of using credit cards or writing cheques buying breadbuying bread buying coffee teabuying coffee tea

Many people do not trust bankMany people do not trust bank they kept their savings under the bedthey kept their savings under the bed note that in our economy there is no inflation yet people note that in our economy there is no inflation yet people

lose interest by keeping money under their pillow the lose interest by keeping money under their pillow the purchasing power of money dose not declinespurchasing power of money dose not declines

4444

The monetary base and the money The monetary base and the money multipliermultiplier

The money multiplierThe money multiplier the change in the money stock for a 1 TL change in the change in the money stock for a 1 TL change in

the quantity of the monetary basethe quantity of the monetary base money stock = money multiplier*money stock = money multiplier* monetary basemonetary base M = m*HM = m*H or when m is a constantor when m is a constant MM22=m*H=m*H22,M,M11=m*H=m*H11 M M22-M-M11=m*(H=m*(H22-H-H11)) M = m* M = m* H H

4545

WhereWhere M: money stock or money supplyM: money stock or money supply m: money multiplier m: money multiplier

then we have the following basic relationsthen we have the following basic relations M = D + CM = D + C H = R + CH = R + C

4646

The value of the money multiplier depends on The value of the money multiplier depends on two key rations,two key rations, the banks’ desired ratio of cash reserves to total the banks’ desired ratio of cash reserves to total

depositsdeposits ccb b = R/D= R/D the private sector’s desired ratio of cash in the private sector’s desired ratio of cash in

circulation to total bank depositscirculation to total bank deposits ccpp=C/D=C/D

4747

The lower the desired cash reserves ratio, The lower the desired cash reserves ratio, the larger the quantity of deposits the banks will the larger the quantity of deposits the banks will

create against given cash reserves create against given cash reserves and the larger will be the money supplyand the larger will be the money supply

4848

The lower the private sectors desired ratio of The lower the private sectors desired ratio of cash in circulation to private sector bank cash in circulation to private sector bank accountsaccounts the larger will be the money supply for any given the larger will be the money supply for any given

quantity of high-powered money issued by the quantity of high-powered money issued by the central bankcentral bank

4949

The money multiplierThe money multiplier

Suppose the banks wish to hold cash reserves R asas fraction (cb) of deposits (D), and the private sectorwish to hold cash (C) as a fraction (cp) of bank deposits (D).

Then R = cbD and C = cp D

Monetary base H = C + R = (cb + cp) D

Money supply = C + D = (cp + 1) D

So M = (cp + 1)

(cp + cb)H

Money supply = money multiplier × monetary base

5050

ExampleExample

cb = 0.1, cp=0.2cb = 0.1, cp=0.2 What is money multiplier?What is money multiplier? m = (1+cp)/(cb+cp)m = (1+cp)/(cb+cp) m = (1+0.2)/(0.1+0.2)=4m = (1+0.2)/(0.1+0.2)=4 increasing H by 1 billion TL increases money increasing H by 1 billion TL increases money

supply by 4 billionsupply by 4 billion if C = 1000 What is H,D, R,M?if C = 1000 What is H,D, R,M?

5151

What happens CWhat happens Cbb or C or Cpp increases increases

CCbb or C or Cpp m m MM hence money supply decreases hence money supply decreases What determines CWhat determines Cbb

interest rates rinterest rates r C Cbb

What dose CWhat dose Cpp depends on? depends on? Institutional factorsInstitutional factors

firms pay wages by cheque of cashfirms pay wages by cheque of cash credit card reduce the amount of cash used credit card reduce the amount of cash used

5252

Measures of moneyMeasures of money

Money supply = cash in circulation + bank Money supply = cash in circulation + bank depositsdeposits which bank depositswhich bank deposits

spectrum of liquidityspectrum of liquidity cashcash sight deposits chequing accounts sight deposits chequing accounts time deposits time deposits

5353

Money stock definitions used by the Money stock definitions used by the Central Bank of TurkeyCentral Bank of Turkey

M1= currency in circulation + sight deposits M1= currency in circulation + sight deposits (excluding official)(excluding official)

M2 = M1 + time deposits (excluding officials)M2 = M1 + time deposits (excluding officials) M2Y = M2 + foreign exchange depositsM2Y = M2 + foreign exchange deposits M3 = M2 + public sight and time deposits with M3 = M2 + public sight and time deposits with

deposit money banksdeposit money banks + other deposits with C.B.+ other deposits with C.B. M3Y = M3 + foreign exchange depositesM3Y = M3 + foreign exchange deposites

5454

During the new economic program Central During the new economic program Central Bank of Republic of Turkey increases high Bank of Republic of Turkey increases high powered money by 100 billion. If the powered money by 100 billion. If the estimated cash to deposit ratio is 0.2 and estimated cash to deposit ratio is 0.2 and reserve to deposit ratio is 0.1 reserve to deposit ratio is 0.1

5555

a. a. What is the change in money supply? What is the change in money supply? b.b. What is the change in deposits?What is the change in deposits? c.c. What is the change in bank reserves?What is the change in bank reserves? d.d. What is the change in money in What is the change in money in

circulation?circulation?

5656

H=100H=100 H= (cb+cp)D or H= (cb+cp)D or H = (cb+cp) H = (cb+cp) DD D= 100/(0.1+0.2)=333D= 100/(0.1+0.2)=333 C=cp C=cp D= 0.2*333D= 0.2*333 R=cb R=cb D= 0.1*333D= 0.1*333 M=mM=mH= ((1+0.2)/0.3)*100H= ((1+0.2)/0.3)*100

5757

In the new economic program governmet is In the new economic program governmet is planning to increase money supply by both planning to increase money supply by both open market operations: increasing high open market operations: increasing high powered money by 200 (powered money by 200 (H=200) and H=200) and decreasing reserve to deposit ratio cdecreasing reserve to deposit ratio cbb. from . from

0.2 to 0.1. Initially H=1000,estimated value 0.2 to 0.1. Initially H=1000,estimated value of cash to deposit ratio is cof cash to deposit ratio is cpp=0.2.=0.2.

5858

a.a. What is the targeted or planned What is the targeted or planned increase in money supply? (3 pnt)increase in money supply? (3 pnt)

b.b. At the end of 2001 the value of money At the end of 2001 the value of money supply is found to be 6000. What is the supply is found to be 6000. What is the difference between targeted and realized difference between targeted and realized values of money supply What might be the values of money supply What might be the reason for this difference between the reason for this difference between the targeted and realized money supply? (3 targeted and realized money supply? (3 pnt)pnt)

5959







Documents

Money and modern banking