Chapter 11: Money, Banking, and the Financial Sector

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Chapter 11 Money, Banking, and the Financial
Sector

• What is the only industry that seriously concerns
  macroeconomists?
• 11.A. Why Is the Financial Sector Important to
  Macro
• 11.B. The Definitions and Functions of Money
• 11.C. Alternative Measures of Money
• 11.D. Banks and the Creation of Money
• 11.E. Regulation of Banks and the Financial Sector

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11.A.Why Is the Financial Sector Important to
Macro?

• What stays in and what leaves the circular flow?
• Spending?
• Saving?
• What has to happen to saving to get it back into
  the circular flow?
• 11.A.1.The Role of Interest Rates in the
  Financial Sector
• 11.A.2. Saving that Escapes the Circular Flow

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11.A.1.The Role of Interest Rates in the
Financial Sector

• When you purchase a good
• What do you give up?
• What do you get in return?
• Do you continue to get that return (at the same
  rate) forever?
• What does that do to the price of used goods?

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11.A.1. Continued

• Are the answers to those questions the same when
  you are buying as asset? For the most part, yes,
  except
• Is an asset depleted the same way a good is?
• Is the resale price of an asset typically better
  or worse than a good?
• What do you pay to borrow an asset?
• What is the ratio of what someone will pay to
  borrow an asset versus what they will pay to own
  it?

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11.A.2. Saving that Escapes the Circular Flow

• What has to happen to saving for it to get back
  into the circular flow?
• Are financial intermediaries strictly necessary
  for this to happen?
• Do they make it easier?

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11.B. The Definitions and Functions of Money

• How does money differ from currency?
• 11.B.1. The U.S. Central Bank The Fed.
• 11.B.2. Functions of Money

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11.B.1. The U.S. Central Bank The Fed.

• Is it our first central bank?
• Did we always have a central bank? Do most
  countries?
• Where does a bank do its own banking?
• With other banks?
• With the Federal Reserve?
• Who puts currency in circulation? Who prints it?

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11.B.2. Functions of Money

• What are they?
• Why dont we barter?
• Does an asset have to have (intrinsic) value to
  be used as money?
• Is money a good or a bad way to settle on a value
  for a deferred payment?
• How is liquidity related to your willingness to
  store value in the form of money?

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11.C. Alternative Measures of Money

• Is liquidity a subjective or objective concept?
• Does this make it easier or harder to define what
  money is?
• 11.C.1. M1
• 11.C.2. M2
• 11.C.3. Beyond M2 L
• 11.C.4. Distinguishing between Money and Credit

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11.C.1. M1

• What assets are closest to currency?
• So, M1 is composed of what?

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11.C.2. M2

• What assets are money, but are less likely to be
  used for transactions?
• So, M2 is composed of what?

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11.C.3. Beyond M2 L

• Are there other (broader) definitions of money?
• As we include more assets in the list we call
  money, what is happening to their liquidity?

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11.C.4. Distinguishing between Money and Credit

• Why isnt a credit card money?
• Who is money an asset to, and for whom is it a
  liability?
• When you make a purchase with a credit card, is
  an asset/liability pair created?
• Or, are assets exchanged?
• A (macabre but useful) way to think about this is
  with probate if you die, will people fight over
  your money or your credit cards?

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11.D. Banks and the Creation of Money

• Is most of what we call money created by the
  (single) central bank, or by the (multitude) of
  private banks?
• 11.D.1. How Banks Create Money
• 11.D.2. The Money Multiplier
• 11.D.3. Faith as the Backing of Our Money Supply

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11.D.1. How Banks Create Money

• Can financial assets be created out of nothing?
• How is this related to financial liabilities?
• Currently, do banks in the U.S. create money?
• Do they create currency?
• Could they? Have they?

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11.D.2. The Money Multiplier

• If you deposit money in a bank, is it always
  there?
• What happens to it?
• If someone else deposits money in a bank, can it
  be loaned to you?
• Does this affect the other person?
• What percent of deposits does a bank hold onto?
• How is this related to the money multiplier?

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11.D.3. Faith as the Backing of Our Money Supply

• Does money have to be backed by some other real
  asset?
• What is a fiat? What is fiat money?
• If you write an IOU, it isnt really money. Is
  that because
• It isnt backed by anything other than faith?
• It isnt very liquid?

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11.E. Regulation of Banks and the Financial
Sector

• What would happen if banks stopped creating
  asset/liability pairs?
• 11.E.1. Financial Panics
• 11.E.2. Anatomy of a Financial Panic
• 11.E.3. Government Policy to Prevent Panic
• 11.E.4 The Benefits and Problems of Guarantees
• 11.E.5 The Savings and Loan Bailout

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11.E.1. Financial Panics

• Did a bank ever refuse to let you withdraw your
  deposits?
• What would you do if they did?
• Should a bank be able to figure out how much cash
  it has to have on hand in order to avoid such
  problems?

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11.E.2. Anatomy of a Financial Panic

• When you deposit money in the bank, is it
  generally short-term or long-term?
• When you take out a loan is its term generally
  longer or shorter than your deposits?
• Does this create a problem for banks?

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11.E.3. Government Policy to Prevent Panic

• Could a solvent bank be driven out of business by
  a panic that was not warranted?
• Is this in anyones interest?
• What programs has the government created to
  prevent this?

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11.E.4 The Benefits and Problems of Guarantees

• Is a bank bluffing when it says that you can
  get your money out when you demand it (Colander
  calls this an illusion, rather than a bluff)?
• If FDIC insures your deposits, is the bank still
  bluffing?
• Are you less likely to call the bank on its bluff
  if your deposits are insured?
• Do bank managers face a moral hazard?

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11.E.5 The Savings and Loan Bailout

• Was fraud a major cause of the SL problems in
  the 1980s?
• Did SL managers fall prey to a moral hazard? How
  so?
• Did the government relax SL regulations prior to
  the bailout?
• Did this test or buttress the business morals of
  SL managers?