10 Banks, money, and the credit market The Economy 1.0

Some of the funds lent to farmers are borrowed from commercial banks like the JS Bank at interest rates averaging 32% per annum, representing a cost to the moneylenders. And the costs of the extensive screening and collection of the debts further reduces the profits made by the lenders. Monetary policy involves the strategies employed by a central bank to manage the money supply and interest rates in order to achieve macroeconomic objectives such as controlling inflation and fostering economic growth. M1 is a narrower measure of the money supply that includes physical currency and demand deposits, which are highly liquid and can be quickly used for transactions. V.4.4. All types of deposits held by money holders at CBs, regardless of maturity, are included in the aggregates other than M1. Money issuers of LF and L are money issuers of M2 plus local and state governments (government bonds), corporations, the Korea Securities Finance Corporation, and life insurance companies.

New Monetary Aggregates

It includes all the liquid assets that can be used as a medium of exchange, such as cash and checking account balances. The money-issuing sector consists of monetary financial institutions (MFIs) and central governments (CGs, Post Office accounts, national savings accounts and Treasury accounts) in the EMU. The Eurosystem comprises the European Central Bank (ECB) and the national central banks (NCBs) of those countries that have adopted the euro.

NM0 (Monetary Base or Reserve Money)

Typically, the availability of liquid money supply—whether long-term or short-term—should have a direct impact on its economic health. broad money refers to However, changes in the economy coupled with changes in the finance industry have translated into an uncoupling of that direct relationship. The Federal Reserve does not implement its policy through changes in the money supply.

In Korea (table 7), financial instruments (deposits, RPs, and cover bills, etc.) are allocated between M2 and M3 entirely according to their original terms of maturity, with the cutoff at twoyears. According to the quantity theory supported by the monetarist school of thought, there is a tight causal connection between growth in the money supply and inflation. However, the strategy was generally found to be impractical because money demand turned out to be too unstable for the strategy to work as intended. M1, M2, and M3 are the different categories of money in an economy.

11 The central bank’s policy rate can affect spending

1. She would like to smooth her consumption because she enjoys an additional unit of something more when she has not already consumed a lot of it.
2. M0 consists of currency in circulation plus bankers’ deposits at the Bank of England.
3. Issuers of M, NM, and NM are commercial banks, cooperative banks and the Reserve Bank of India (RBI) for currency, coins, anddeposits.
4. More generally, the value to the individual of an additional unit of consumption in a given period declines the more that is consumed.
5. If we combine Figures 10.2 and 10.3a we will have the answer.
6. Like Julia, Marco will find the amount of storage that gets him to the highest feasible indifference curve by finding the point of tangency between the indifference curve and the feasible frontier.

Here, she chooses to borrow and consume $58 and repay $64 later, leaving her $36 to consume later. We know that at this tangency point, the slope of the indifference curve is equal to the slope of the feasible frontier (otherwise the curves would cross). If we combine Figures 10.2 and 10.3a we will have the answer. As in the other examples of a feasible set and indifference curves, Julia wishes to get to the highest possible indifference curve, but is limited by her feasible frontier.

Money issuers are deposit money banks (DMBs) and Central Bank of the Republic of Turkey (CBRT) for currency and deposits, the Treasury Department of Turkey for coins. Money holders are local government, non-financial corporations, households, and financial corporations other than banks and state lending institutions. Defined monetary aggregates are M1, M2, liquidity aggregate of financial institutions (LF), and liquidity aggregate (L).

Issuers of M2+ and M2++ are, in addition to those of M1+ and M1++, central government for savings bonds, government-owned savings institutions, and life insurance companies. The EMU comprises 12 members of the 25 European Union countries that have adopted a single currency (the euro). They are Austria, Belgium, Finland, France, Germany, Greece (joined in 2001), Ireland, Italy, Luxembourg, Netherlands, Portugal, and Spain.

1. V.4.5. Promissory notes issued by FCs held by money holders are included in the aggregates other than M1 and M2.
2. Since it is measured over a period of time (such weekly or yearly), it is a flow variable.
3. Money issuers of M1 and M3 consist of Reserve Bank of Australia (RBA) for notes and coins, and Authorized Deposit-taking Institutions (ADIs).
4. Credit or debit cards were not yet widely used.
5. Savings deposits and time deposits are classified by terms of maturities with savings redeemable at a period of notice up to 3 months and time deposits maturing up to 2 years being included in non-M1 component of M2.

M3 includes all the items in M2, plus repurchase agreements, money market fund shares, money market paper, and debt securities issued with a maturity of fewer than two years. Because cash can be exchanged for many kinds of financial instruments, it is not a simple task for economists to define how much money is circulating in the economy. Money supply is measured in different ways. Economists use the capital letter “M” followed by a number to refer to the measurement they are using in a given context. If the borrower had been wealthy, she could either use her wealth as collateral and as equity in the project, or she could have been on the other side of the market, lending money.

We saw that anything that is accepted as payment can be counted as money. But money in this sense is different from legal tender, which is also called base money or high-powered money. Unlike bank deposits or cheques, legal tender has to be accepted as payment by law.

Since the central bank controls the supply of base money, it can also decide the interest rate. The central bank intervenes in the money market by saying it will lend whatever quantity of base money is demanded at the interest rate (i) that it chooses. Like any other firm in a capitalist system, banks can also fail by making bad investments, such as by giving loans that do not get paid back.

Central banks are the issuers of currencies. Seven central banks (in EMU, Cyprus, Estonia, India, Norway, Switzerland, and Turkey) also issue M1-type deposits for money holders, with the first three issuing M2-type deposits as well. This category group contains information states of growth and trends of nominal and real monetary aggregates. Monetary aggregates are banking system liabilities that at least partly function similar to traditional money.

Variations among monetary aggregates also arise from differences in scopes of financial instruments, money issuers, and money holders being included in money. The public’s demand for currency and bank deposits and commercial banks’ supply of loans are consequently important determinants of money supply changes. Narrow money supply, also known as M1, refers to the total amount of physical currency in circulation in an economy, along with demand deposits held by commercial banks and other financial institutions.

Wealth is the accumulation of past and current saving. One form that saving can take is the purchase of a financial asset such as shares (or stocks) in a company or a government bond. Although in everyday language these purchases are sometimes referred to as ‘investment’, in economics, investment means expenditure on capital goods, which are goods such as machinery or buildings. The Broad money includes all public time deposits with all banks, including cooperative banks. Savings deposits and time deposits are classified according to whether they are personal or non-personal and with banks or non-banks, regardless of their term of maturity. Personal deposits are in narrower money than non-personal deposits, and bank deposits are also in narrower moneythan non-bank deposits.