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1 The European Central Bank (ECB) is the central bank for the EMU, which issues the euro and has been responsible for conducting monetary policy for the EMU since January 1, 1999. Thus, NM1 includes currency with the public and non-interest-bearing deposits with the banking sector including that of RBI. Broad money refers to the total money supply in an economy, including cash, checking accounts, and savings accounts.

III. Comparison of Monetary Aggregates for Individual Countries

The yield is equal to the interest rate of 3%. If the central bank raises the policy interest rate, then this will reduce the market price of the bond, increasing the yield in line with the interest rate. Base money remains essential, however, partly because customers sometimes take out cash, but also because when Gino wants to spend his loan, his bank has to transfer base money. Suppose Gino employs Marco to work in his shop, and pays him $10.

1. The risk they face is that depositors can all decide they want to withdraw money instant­aneously, but the money won’t be there.
2. This duration, however, is not a strict definition.
3. III.2 The composition of monetary aggregates broader than M1 varies substantially.
4. Suppose in the above example that Gino wants to pay $50 to Marco (and there are no other transactions that day).
5. Another possible combination is to borrow and spend just $30 now, which would leave Julia with $67 to spend next year, after repaying her loan.
6. Special deposits – miscellaneous deposits made for the arrangement purposes such as temporary deposits or custodial deposits accompanied with various banking activities.

Holders of M2a – households, private businesses, SBs, and OFCs. Holders of M3 are households, private businesses, and OFCs. Issuers of M3 are BOT, CBs, FCs, and specialized banks (SBs). MMMFs and RPs are excluded from M1, M2, and M3, but RPs are included in M2YR and M3YR.

Explain how you think such an arrangement would affect the borrower’s decision about what to spend the money on, and how hard she will work to make sure that repayment is possible. The relationship between wealth and credit is summarized in Figure 10.20. If the project doesn’t succeed because the borrower made too little effort, or because it just wasn’t a good project, the lender loses money. If the borrower were using only her own money, it is likely that she would have been more conscientious or maybe not engaged in the project at all. At the interest rate of 10% she would borrow and spend $58 now (point E).

Consequently, the money supply has lost its central role in monetary policy, and central banks today generally do not try to control the money supply. Instead they focus on adjusting interest rates, in developed countries normally as part of a direct inflation target which leaves little room for a special emphasis on the money supply. Money supply measures may still play a role in monetary policy, however, as one of many economic indicators that central bankers monitor to judge likely future movements in central variables like employment and inflation. Narrow money, also known as M0 and M1, refers to the most liquid forms of money, including physical currency and demand deposits. It represents the basic medium of exchange in an economy, unlike other money categories, such as M2 and M3, that include less liquid assets, such as long-term deposits.

1. The reason is that it is impossible for the lender to ensure by contract that the borrower will use the funds in a prudent way that will allow repayment according to the terms of the loan.
2. Broad money may include various deposit-based accounts that would take more than 24 hours to reach maturity and be considered accessible.
3. V.2.3. Money holders are private non-bank residents.
4. If the crops in Chambar, Pakistan were destroyed by bad weather or disease, the money­lenders would not be repaid even though the farmers were hard-working.
5. Compare the feasible sets of Julia shown in Figure 10.4 and of Marco, whose options are shown in Figure 10.10.

II. Criteria for Monetary Aggregate Classifications

Bonus Bank lends him the money by crediting his bank account with $100, so he is now owed $120. So Bonus Bank’s balance sheet has expanded. Its assets have grown by the $100 it is owed by Gino, and its liabilities have grown by the $100 it has credited to his bank account, shown in Figure 10.13c. A bank is a firm that makes profits through its lending and borrowing activities. The terms on which banks lend to households and firms differ from their borrowing terms. The interest they pay on deposits is lower than the interest they charge when they make loans, and this allows banks to make profits.

Unit 10 Banks, money, and the credit market

Another way of saying this is that the net worth of a firm, like a bank, is equal to what is owed to the shareholders or owners. This explains why net worth is on the liabilities side of the balance sheet. If the value of the bank’s assets is less than the value of what the bank owes others, then its net worth is negative, and the bank is insolvent. We would be willing to pay at most €107.43 for this bond today, even though it generates €120 of revenue over four years.

In order to smooth, he wishes to move some goods to the future. He could store the grain, but if he did, mice would eat some of it. The grain they eat represents a reduction in Marco’s wealth due to the passage of time. So, taking account of the mice, if he consumed nothing at all during this period he would have just $80 worth of grain a year later. This means that the cost of moving grain from the present to the future is 20% per year.

If the borrower is paying the loan back in four months (the growing period of the crop prior to harvest), 100 rupees borrowed before planting will be paid back as 126 rupees. Knowing that more than half the loan applications are refused, the borrower would consider himself fortunate. If the farmer’s crop fails due to the farmer’s lack of attention, the lender loses money. Ordinary deposits – demand deposits that are depositable and withdrawable at any time. V.2.5. Foreign currency denominated deposits are excluded from each aggregates. M1, M2, and M3, which exclude foreign currency deposits, and RPs.

RPs, bonds (Japanese government and foreign), commercial papers, and other financial broad money refers to instruments are included in L. Foreign currency denominated deposits are excluded from M1, but included in all other broader aggregates. MMMFs and individual annuities at life insurance companies are included only in M2+ and M2++, while all other mutual funds and Canadian savings bonds are included only in M2++. Foreign currency denominated deposits are included only in M3, not M1, M2 or other aggregates. M1+, M1++, M2+, and M2++ include non-bank deposits and other financial market instruments, in addition to currency and bank deposits. The criteria used to classify and define monetary aggregates by individual countries are compared and summarized.

Marco’s reservation indifference curve goes through his endowment. Her discount rate ρ depends on both her desire to smooth consumption and on her degree of pure impatience. 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. Think about food—the first few bites of a dish are likely to be much more pleasurable than bites from your third serving.