GRAPHS AND BANKING SYSTEM

Demand Graph

Demand for money increase inverse w/nominal interest rate and quantity of money (Q decreases, I increases and vice versa)

Shifters: Change in
-PL
-Income
-in taxation after investment

Money Supply
Affects AD when

Increased: -> r down, Ig up, AD up (Vertical)
Decreases - Goes Left: MS down, r up, Ig down, AD down

Financial Sector
Fin. Assets - Stocks and bonds provide expected future benefits
Benefits owner from issuer of asset meeting certain obligations
Fin. Liabilities - Incurred by issuer of fin. asset to stand behind issued asset
Interest Rate - $ paid to use fin. asset
Stocks - Fin. asset that represent ownership in a company
Bonds - Promise to pay $ and interest in the future

Banks
Fin. Intermediary - use liquid assets to fund investments of borrowers -> Fractional Reserve Banking
Liquid assets include currency in bank vaults and bank reserves
Banks create money by lending out deposits that are used multiple times
When a customer deposits cash or withdraws cash from their demand deposit account, it has NO EFFECT ON THE MONEY SUPPLY

It only changes...
-The composition of money
-Excess Reserves
-Required Reserves
-Changes in Money Supply for....
-Single Bank
-Loan money from ER
-Banking System
-ER x Money multiplier (1/RR) -> Total Money Supply
-When the FED buys or sells bonds, ER is created

Basic Accounting Review

T-Account (Balance Sheet) - Lists assets and liabilities

Assets (Amounts owned) - Items claimed legally by bank; use of funds by fin. intermediary

Included in assets

-Required Reserves - % of DD in vault
-Excess Reserves - Remaining % of DD used for loans
-Property - Statement of a bank's property values
-Securities or Bonds - Previously purchased bonds held by the banks as investments
-Loans - Previously loaned funds now owed back to the bank
-Liabilities (Amounts owed) - Legal claims against a bank; sources of funds.

Included in liabilities
Demand Deposits - Cash deposits from the public to the bank
Part of MS if from person's cash holdings
Becomes new $ if from a bond -> MS up
Owner's equity or stock shares - Values of the bank stocks as held by the public
DD = RR + ER