...monetary policy is hugely impacted by a stable money demand. Because it facilitates a change, which is policy driven in monetary aggregates to have influences that can be predicted on output, interest rate and price. Due to the importance of money demand, a lot of theoretical and empirical research has been done specially on developed countries such as United States and United Kingdom. In this paper, money demand for the United States is analyzed in relation to household wealth and inflation. “Housing wealth and U.S. money demand” by Ivo J. M. Arnold and Sebastian Roelands and “On the welfare cost of inflation and the recent behavior of money demand” by Peter N. Ireland; are the two literatures used for analyzing money demand. Arnold and Sebastian (2010) use state level date from the year 1977 to 2008 in order to estimate a panel model for United States money demand. Housing wealth was included in the money demand function to see the relationship between monetary aggregate and housing wealth. The foundation in the behavior of a monetary policy is hugely impacted by a stable money demand. Because it facilitates a change, which is policy driven in monetary aggregates to have influences that can be predicted on output, interest rate and price. Due to the importance of money demand, a lot of theoretical and empirical research has been done specially on developed countries such as United States and United Kingdom. In this paper, money demand for the United States is analyzed in relation...
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...2013 The Control of Money Supply & Demand of Money Today, we live in a world of scarcity where resources are limited and the choices one make has become so vital the economy. In the US, the government, the Federal Reserve, have control on the effect of supply and demand and money growth. As both supply and demand for money each depend on the interest rate, we specifically look at how inflation effects supply and demand on money. There are differences of money supply and demand for money; where it comes from and how it’s demanded. Given there are many variables that can effect money supply and the demand for money, we will focus on where it comes from and how inflation effects it. In the book, The General Theory of Employment, Interest, and Money by John Maynard Keynes, he explains liquidity factors in economic interest rates that balance supply and demand for money. There are two different types of interest rate that help explain, in monetary terms, how much borrowers pay for borrowed funds. Generally, during a period of inflation where prices increase, nominal interest can be misunderstood. As the nominal interest rate rises or falls, it can be misleading as to how much the borrower is truly borrowing and how much the lender is receiving. When the borrower repays the principle loan, they lender may not be able to purchase as much goods and services, then when originally loaned. This is because when the loan was initially issued the money was worth more than...
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...Quantity theory of money (QTM) – suggests that the demand for real money balances is proportional to income. Quantity eqn.: MxV=PxT where M – money supply; V – velocity of money: the # of times a PhP bill changes hands for time, t; P – price level; and, T – transactions. 1 13/10/2015 Income (Y) version of the QE: MxV=PxY ◦ where V: the # of times a PhP bill enters someone’s income; ◦ P x Y: nominal GDP. This version of the QTM is used since it is difficult to observe transactions. Money Demand & the Quantity Theory of Money: uses real money balances to measure the purchasing power of the stock of money; the money demand function is like the demand function for a particular good, i.e. the convenience of holding real money balances; 2 13/10/2015 Money demand function below shows that the quantity of real money balances demanded is proportional to real income; M P D kY There is an inverse relationship between V & k: M x V = P x Y if V=1/k This implies that when: (M/P)D is high, k is large, V is small: money changes hands less; OR, (M/P)D is low, k is small, V is large: money changes hands more. 3 13/10/2015 Velocity (V) & the QTM: M x V = P x Y If V, is assumed to be constant, QTM explains what determines nominal GDP; A change in M leads to a change in nominal GDP, thus, if V is fixed, the quantity of money determines the...
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...The first theories to hold cash is to avoid the cost of being short liquid assets (Baumol, 1952) (Tobin, 1956) (Meltzer, 1963) (Miller and Orr, 1966) and Karni (1973). Besides the fact that the cash-to-assets ratio for U.S. firms almost doubled (Bates, Kahle & Stulz, 2009) we think that U.S. firms do not hold too much cash. Firms hold cash for different motives. According to Keynes (1936) these motives are: a transaction motive, precautionary motive and speculative motive. Based upon these three motives we explain why U.S. firms hold a lot of cash. The first motive for holding cash is the precautionary motive (Keynes, 1936), which tells us that firms hold extra cash to be prepared for sudden uncertainty - a risk which cannot be hedged. Bates et al. (2009) states that an increase in idiosyncratic risk leads to an increase in cash flow volatility. This volatility increase evolves in an increase in the volatility of unhedgeable risk. A reaction to unhedgeable risk is to hold more cash. You want to have some savings when you have to do unexpected expenses. Research (Bartram, 2009) shows that U.S. firms are more exposed to idiosyncratic risk than foreign firms. This is due to several country characteristics. Because U.S. firms face larger exposures to idiosyncratic risks than foreign firms do, they will have more cash holdings. Moreover, there has been an increase in earnings volatility for U.S. firms over the past decades (Boileau and Moyen, 2012). This increase in volatility...
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...Exam Study Chapter 3-What is Money * Medium of Exchange: * Eliminates the trouble of finding a double coincidence of needs (reduces transaction costs) * Promotes specialization * A medium of exchange must * be easily standardized * be widely accepted * be divisible * be easy to carry * not deteriorate quickly * Unit of Account: * used to measure value in the economy * reduces transaction costs * Store of Value: * used to save purchasing power over time. * other assets also serve this function * Money is the most liquid of all assets but loses value during inflation * M1 (most liquid assets) = currency + traveler’s checks + demand deposits + other checkable deposits. * M2 (adds to M1 other assets that are not so liquid) = M1 + small denomination time deposits + savings deposits and money market deposit accounts + money market mutual fund shares. Chapter 4- Interest Rates Four types of credit market instruments * Simple Loan-pv= fv/(1+i)1 * Fixed Payment Loan-same cash flow every period throughout the life of the loan * Coupon Bond-add the fv at the end * Discount Bond- ytm>coupon ROR vs Interest Rate * The return equals the yield to maturity only if the holding period equals the time to maturity * A rise in interest rates is associated with a fall in bond prices, resulting in a capital loss if time to maturity is longer than...
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...COURSE UNIT: EC223 MONEY AND BANKING DATE OF SUBMISSION: NAME: KALULE RICHARD REG NO: 10/U/66/BEK/GV SIGNATURE Money can be defined as any thing that is generally acceptable as a medium of exchange. It can also be defined as a third commodity that is introduced between two other commodities to facilitate exchange. Money can therefore be looked at as an instrument that helps in fulfillment of contracts, discharge of debts and as a standard of deferred payment. Due to the obligation of people to accept money in the discharge of debts, money is often referred to as legal tender. The demand for money can be defined as the desire by the public to hold cash other than investing it in interest earning assets. it can also de defined as the desire by the individuals and businesses to hold their incomes partly in cash and partly in form of assets. The question of why do people demand for money has been a great topic of discussion among the economists from the days of the classical economists to the monetarists but like many other economic phenomena, no common consensus has ever been reached. Unlike the goods and services, money has no intrinsic value that is to say does not provide direct utility. Instead, the existence of money helps in improving the transactions where we obtain goods that satisfy human wants. Money is therefore useful because it provides an improved alternative in transactions technology over barter trade. The demand for money arises from the two...
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...sum of money on demand or at a certain time. Promissory notes, bills of exchange, checks, drafts, and certificates of deposit are all examples of negotiable instruments. Negotiable instruments may be transferred from one person to another, who is known as a holder in due course. Upon transfer, also called negotiation of the instrument, the holder in due course obtains full legal title to the instrument. Negotiable instruments may be transferred by delivery or by endorsement and delivery. One type of negotiable instrument, called a promissory note, involves only two parties, the maker of the note and the payee, or the party to whom the note is payable. With a promissory note, the maker promises to pay a certain amount to the payee. Another type of negotiable instrument, called a bill of exchange, involves three parties. The party who drafts the bill of exchange is known as the drawer. The party who is called on to make payment is known as the drawee, and the party to whom payment is to be made is known as the payee. A check is an example of a bill of exchange, where the individual or business writing the check is the drawer, the bank is the drawee, and the person or business to whom the check is made out is the payee. To be valid a negotiable instrument must meet four requirements. First, it must be in writing and signed by the maker or drawee. Second, it must contain an unconditional promise (promissory note) or order (bill of exchange) to pay a certain sum of money and no other...
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...Banking resources acquired on the interbank market; -1- The structure of attracted resources, and their importance for the conducting banking activities; In the world of banking practice, the attracted resources of a bank can be: 1) Deposit - are formed on the initiative of clients who come to deposit money in the banks, 2) Non-deposit: - Resources arising from the issue of equity (bank certificates, bills of exchange, and bond); - Resources purchased from other banks (centralized bank credit (from National Bank) and decentralized (from other commercial banks)); In the total amount of banking resources attracted resources occupy the dominant position. Their share of different banks varies between 85 - 90%. -2- The characteristics and typology of a bank deposit; Deposit – the amount of money placed into a banking institution for safekeeping, through depositing money in a bank account. Deposits are classified according to: * Depositor’s category: 1. Individuals; 2. Legal entities; * The terms of the contract, which stipulates how and when is deposit’s maturity: 1. Demand deposit; 2. Term deposit; 3. Savings deposit; * Demand deposits have the following characteristics: * Bank’s means may be deposited in the account and withdrawn without a notice; * based on these accounts can be issued checks; * means can be withdrawn as both cash and non-cash; * account holder will pay a...
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...Supply and demand are one of the key factors when it comes to the economics of a country or region. The two factors happen to be the greatest determinants of prices. In cases where there is a high demand and low supply in a region, the prices of commodities or services provided tend to hike. The hiked prices due to high demand and low supply lead to inflation. Inflation has become a worldwide phenomenon that has seen the cost of living to shoot up in most parts of the world. This increase in the cost of living is attributed to by the increase in the demand for basic commodities and a decrease in their supply due to increased cost of production. Even though the whole world experiences inflation, different countries have different inflation rates depending on their development stages. The major factors that contribute to the increase or decrease in inflation rates in a country include the quality theory of money approach, excessive demand and decrease in supply. This paper will discuss these causes of inflation and the effect they have on the economy as a whole. Causes of Inflation Many factors contribute to the increase or decrease of the inflation rate in a country. Spending habits of individuals happen to contribute greatly to increased inflation rates. A good example is when people have too much money to spend on a given product. The increase in the demand for that particular commodity may not match up with its production. This, therefore, leads to an increase in demand and a decrease...
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...Money, according to our definition, A. has to be backed by something valuable, such as gold or silver. B. does not have to be generally accepted in payment of obligations. C. can include credit. D. has to be issued by government. E. none of the above Money, according to our definition, A. need not be in common use. B. is generally accepted to pay debt. C. has to be issued by government. D. does not need to be useful to pay off obligations. E. needs to be backed up by gold. Which of the following is not a function of money A. Unit of Account B. Medium of Exchange (Means of Payment) C. Store of Value D. Provider of Peace and Security E. Standard of Deferred Payments M1 money in our society includes A vault cash of commercial banks B. cash held by private citizens C. deposits of commercial banks in the Federal Reserve Bank D. saving account deposits of private citizens and businesses in banking institutions E. U.S. Government bonds The M1 definition of money in our society includes A. bonds held by the public B. checking account deposits C. cash in the vaults of banks D. deposits of banks at the Fed e. savings accounts Nobody likes high interest rates. One governmental official says that the government can keep interest rates down by putting lots of money into circulation. What do you think of this idea? A. It will work. More money in circulation will immediately lead to lower interest rates. B. It won't work. More...
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...“Negotiability” Business II March 7, 2016 Joelle writes on a piece of paper that he promised to pay Rio $1000 on demand, he also signs the note with all these things this is negotiable instrument called promissory note. Promissory note is a document passed from one person to another that is a written and signed unconditional promise to pay a specified sum of money on demand or at a definite time to order (to specific person or entity) or bearer. Promissory notes generally involve just two parties: the person signing the note who is promising to pay money (the “maker” of the note); and the person to whom the note specifies the money is to be paid (the “payee” of the note) (Promissory Note). Now just because you write on a piece of paper that you owe someone money and sign it doesn’t mean that you have created a negotiable instrument under the UCC. There are certain things that are require in order for it to be a negotiable instrument. These things include a signed document of promising payment of money and it must be unconditional, the amount of money must be a fixed amount (with or without interest charges), the instrument must be payable to bearer, the promise must be payable on demand or at a definite time, and the promise must not state any other instruction by the person promising or ordering payment to do any act in addition to the payment of money. Joelle note contain all of the above, which makes it a negotiable instrument called a promissory note. Joelle promissory...
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...Index Deposit Banking - Introduction 3 Origins 4 Demand deposits 6 Time deposits 7 Fractional-reserve Banking 8 Full-reserve Banking 10 Bibliography 13 Deposit Banking - Introduction Having money is not always as easy as it seems. Why keeping it at home when there are much safer institutions out there? But, bringing the money to a bank requires knowledge of how to deposit it and of what the bank is actually doing with it. Deciding between the possibility of withdrawing everything or even generating money by investing it for a longer period of time should be a crucial question for every investor. Moreover, the process of depositing it raises disputed questions on who is proprietor and on the possessor’s privilege to handle it. Bank deposits developed and changed throughout history. Farmers, looking for a place to protect their grains from theft, stored their harvest in warehouses in exchange for a receipt and the possibility to get it all back after redeeming it. Later on, owners of gold and silver used the same idea to store their more fungible goods at banks. At the beginning, those deposit banks obtained gain by demanding a fee for the time the good was deposed there. The depositor’s assets remained untouched. It is not difficult to imagine that those institutions succumbed to the temptation of taking them and loaning them away in order to expand their sources of income. This kind of activity is called embezzlement. It means to use entrusted...
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...economy” and the search for pecuniary gains: ................................................... 3 ð Determination of employment in the short period: ................................................................. 3 ð The rudiments of a theory of expenditure and critique of Say’s law: ....................................... 4 ð A more detailed theory of expenditure: .................................................................................. 4 ð Uncertainty, expectation and confidence: ............................................................................... 4 ð Investment, asset choice and liquidity preference: ................................................................... 4 ð Employment and the essential properties of money: ............................................................... 4 ð Potential instability: ................................................................................................................ 5 ð Investments, saving and banking system:................................................................................. 5 conclusion: ..................................................................................................................................... 5 Page 1 of 5 Keynes’s “GENERAL THEORY” valid only for modern capitalism? This article focuses on the interpretation that restricts the applicability of Keynes General theory for modern capitalism. It makes his...
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...The United States had been spending money while having a national debt since 1960. National debt existed for three main reasons: economic, political, and future unpredictability. Economic concerns include the national debt being a grave concern if it wasn’t able to be paid back because it would regard our once stable valuable currency as worthless. Eight percent of all federal spending was an affordable interest on the debt. The government would be called upon economically in the future and the growing debt would only further complicate things in terms of their help. The public is also very uneducated in terms as to what the federal debt is used for. The borrowing continues regardless of the debt being very high. However uneducated the public,...
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...Supply and Demand University of Phoenix XECO/212 When prospective homebuyers are looking to buy a new home in their area, they should consider the health their local real estate market is in. A prospective homebuyer needs to have an understanding of the many different economic trends a real estate market can have, There are many different business cycles and real estate trends that will have an affect on why a homebuyer would purchase a home and there are different monetary advantages depending on what kind of business cycle going on at the time. The major factor that has an influence on the price of housing is supply and demand of your local real estate. The most basic economic principal on a products price is supply and demand, Supply and demand determines the price of products based on the availability products. If a products demand is high and the supply is low then the price will increase, because people are buying large quantites of the product and if supply is high and the demand is low, It’s probable that people are not buying the product at that time so the price will generally be lower than it would if people were buying a large amount of the product. There will always be a need for homes because there will always be people that need them which makes homes inelastic. The terrorist attacks in September of 2001 created a substantial amount of uncertainty within our economy and spawned a consumer confidence crisis...
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