Hello..mynameisJenniferClarkwiththeUniversityofFloridaandwelcometoweek 6section1ofEconomicIssues,Food,andYou;Money,Banking,andCredit.

Todaywelldiscusstopics thatareusuallyofinteresttostudents,moneyandcredit andthemechanismthatfinancialintermediarieslikebanks..playinfacilitatingthe exchangeandstoreofvalueforourvaluableeconomicassets

Wewilldefinemoneyanddiscussthe functionsof itsmediumofexchange,unitof account,andstoreofvalueinaneconomyandhowthesefunctionsaredirectly relatedtosavingsandinvestmentwithintheeconomy.

Wellidentitythe maintypesoffinancialinstitutionsthatengageinfinancialmarkets toprovidebankingservicesanddescribetheirfunctionswithinaneconomy..

Welldiscusstheframeworkofafractionalbankingsystemanddemonstratehow demanddepositshelptodeterminethesupplyofmoneyandloanablefunds.

andfinallywewillanalyzehowsomegovernmentpoliciescanaffectsaving, investment,andtheinterestrateviathemarketforloanablefundswithinthe economy.

Money,banking,andcredit aswellasfinancialmarketsincludingthemarketfor loanablefunds,thestockmarket,andbondmarketallcontributetothefinancial flowswithinaneconomy.Inthislesson,wewilldefinewhatwemeanbymoneyand itsusefulnessfortradeandexchangewithinaneconomy.Wellalsoconsidersome specificterminologyrelatedtoeconomicinvestmentsbyfirmsaswellasthepartthat consumersplayinthemacroeconomybytheireffortstosavemoneybydepositingit inbankstomakeitavailableforthemarketforloanablefundsitsaninteresting concepttoconsidertheconceptoffractionalreservebankingthatexiststofacilitate theefficiencyoftradingmarketgoodsandservices.

Tobegininthebeginningbeforemoneywasinventedasameansofexchange ofgoodsandservices,participantsintheeconomyreliedupontradeofothergoods andservicesinexchangeforgoodsandservicesthattheydesired.Thiswasnota veryconvenientwaytoengageinmarketactivitiesprimarilybecauseitdependedon yourtradingpartnershavingacoincidenceofwantingtoexchangewhatyouhadfor whattheyhadtotrade.Thiscoincidenceofwantsledtothedevelopmentofwhat wecommonlyrefertonowasmoney.

Inoureconomy,whichcanbesimplifiedthroughacircularflowdiagram,moneyas wenowknowit..is usedforthreeprimaryfunctions:first,asamediumofexchange usedtotransferthefutureownershipofgoodsandservicesofvaluefromtheseller tothebuyer.Throughtheuseofmoney,consumersnolongerneedtorelyonbarter (directlytradinggoodsorservicesasacoincidenceofwants)andinsteadutilize somethingofvaluethatisgenerallyacceptablebyallparticipantsintheeconomy. Manyofusunderstandmoneytobesomeformofvaluablemetal(likegoldorsilver) orgovernmentbackedtreasurynotes(likedollarbillsandcoins).Asecondfunction ofmoneyisasaunitofaccount,itisstandardizedtorepresentthevalueofgoods andservicesasaunitofaccountforexampleyouprobablyhaveageneralideaof thevaluethatonedollarofpapermoneywillbuyorusingyourowncountrys currency,youhaveageneralideaoftheunitofvalueforyourunitofcurrency.A thirdfunctionofmoneyrepresentsastoreofvalueinwhichpurchasingpoweris storedovertimefortheindividual.Imagineifwewererequiredtotradeinunitsof freshproduceorseafood?Althoughfoodisavaluablecommodity,andcouldbe tradedforothergoodsandservices,thistypeofarrangementcouldgetmessypretty quicklyalthoughfooditemscouldbeconsideredamediumofexchange,theunitof accountisntstandardizedandthestoreofvalueisprettyshortlived.Tohavepaper billsandcoinageasrepresentativemoneywithastandardizedunitofaccountand longtermstoreofvalueisveryefficientfordevelopedeconomiesastheyengagein marketsforfactorsofproductionandmarketsforgoodsandservicesinourcircular flowmodelofeconomicactivity.

Continuingonwiththisdiscussionofhowmoneyflowsthroughthecircularflow diagram,whiletheconsumersincomecanbeusedtopurchasegoodsandservicesin aneconomy,theconceptofsavingspermitsconsumerstodelayconsumptionby deferringconsumptionintothefuturegenerallytheseconsumersdeposittheir savingsinafinancialinstitutionandearninterestontheaccount(ortheycouldjust buryitinthebackyardorstuffitundertheirmattress).

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Assumingthattheconsumerwhosavessomeofhisorherincomeactuallydepositsit intoafinancialinstitution,then,thesavingsdepositscanbeusedbythefinancial institutiontoloantootherconsumerswhodesiremoneynow(fortheirowncurrent consumptionoruse).Savingsbyconsumerswhodeposittheirmoneyintoafinancial institutioncontributestotheoverallmarketforloanablefundsandtheinterestrate theyreceiveisthepriceoflettingsomeoneelseusetheirmoney!Welldiscussthe marketforloanablefundsinanupcomingsectionandrelateourconceptsofsupply anddemand...

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Letsshiftgearsinourdiscussionabouthowmoneyisusedinoureconomy,and considerthefirmsuseofmoneyinaspecificcontext.Whilefirmsdousemoneyto purchaserawmaterialsforproductionandtopayfortheuseoflaborforitsworkers, theyalsousemoneytopurchaseland,buildings,andequipmenttobeusedinthe futureproductionofgoodsandservices.Thistypeofpurchaseofbuildings,and equipmentiscalledcapitalinvestment.Capitalisdefinedtobegoodsthathavebeen produced(likeaproductionplantorassemblyline)thatwillbeusedbythefirmto produceadditionalgoodsandservicesforsalebythefirm.Investmentisoneof thosetermsthatstudentsofeconomicsneedtolearnbutshouldexercise cautioninvestmentspendingmeanssomethingdifferentforeconomiststhanwhat isusedtodiscussfinanceandthestockmarketandthisdefinitionthatwe economistsusetoexplaineconomicbehaviorisprobablydifferentfromwhatyou mightinitiallythink,sobecareful!Ineconomicsandmacroeconomicdiscussions, investmentisspendingbyfirmsonbuildingsandequipment(capitalequipment)used toproducejobcreatingmarketgoodsandservices.Themoneyspentonlandand capitalequipmentiscalledinvestmentspending.

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Inourinvestmentdefinition,itishelpfultoconsiderthesymbioticrelationshipof investmentforfirmsasitrelatessavingsforourconsumers.Investmentspending permitsfirmstopurchaseresourcesthatwillcontributetotheiroverallabilitytoearn futureprofits.Firmsmaypayforlandandcapitalequipmentforjobcreatingand incomeproducingexpendituresusingmoneybutmanytimesthepurchaseofcapital equipmentisfinancedthroughloansmadebyfinancialinstitutions.loansmadeby loaningoutmoneydepositedthroughconsumersavings.Welldiscussaconcept calledthefractionalbankingsystem,thatpermitsfinancialintermediariestomake loansandinandthenwecananalyzethefirmsdemandbehaviorinthemarketfor loanablefunds.

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Firmsthatareengagedinthebuyingandsellingofmoneyarecalledfinancial intermediariesandtheyserviceconsumersandfirmswhodepositmoneyanddesire toborrowmoneytopurchasegoodsorservices.

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Examplesoffinancialintermediariesincludesavingsandloanbanks,commercial banks,insurancecompanies,mortgagecompanies,creditunions,andloanagencies amongothers.Theactivitiesoftheseagentscreatesfinancialmarketsthatyouhear aboutinthenewsastheycreatevaluebyconnectingsaversandborrowerswho makeupthesuppliersanddemandersinthemarketforloanablefunds.Wewill narrowourfocustodiscussonetypeoffinancialintermediaryinthefinancial markets,commercialbankswhoprimarilyacceptdepositsofmoneybysaversand loanmoneytoborrowers.

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Themarketforloanablefundscanbeillustratedthroughtherelationshipsofsupply anddemandforloanablefundsnotethatthemarketforloanablefundsisa representativemodeloftheactivitiesinthefinancialsystemandnotabankoran actualplaceInthismodel,saversrepresentthesupplyofloanablefundsinthe marketforloanablefundsandborrowersrepresentthedemandersinthemarketfor loanablefunds.Saversearnsomeinterestrateonthemoneytheydepositand borrowerspaythebankaninterestratefortheuseofthemoney.Theamountof interestthatbanksearnfromborrowersishigherthantheamountthatthebankspay tosavers(thebanksearntheirrevenueandprofitsfromthedifferencebetweenthe tworates).Wecanillustratethismarketinthesamewaythatwehaveillustratedthe marketforgoodsandservices.quantityofloanablefundsisrepresentedonthe horizontalaxisandthepriceofloanablefundsisrepresentedonthevertical axisnotethatthepriceofmoneyisalsocalledtheinterestrate.

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Becausecommercialbanksareabletoloanmoneytothoseindividualswhowantto borrow,youmightinitiallythinkthatthebanksareonlyabletoloanoutmoneythat saversdeposit(pluskeepingsomemoneyavailableinthebankvaultasreservesin casesaverswanttowithdrawandusesomeoftheirmoney)butthiswouldbe incorrectinafractionalreservebankingsystem.Inreturnforacashdeposittothe bank,thebankgivesthesaverademanddepositinwhichthesavercandemand theirdepositbackatanytime.Inthistypeofbankingsystem,onlyaportionofthe cashdepositsmadebysaversisactuallyheldonhandinthebankvaultincasesavers wanttomakeawithdrawal.Thisportionofcashheldbythebankiscalledcash reservesandthegovernmentrequiresacertainpercentageofdepositsbeheldbythe bank;howeveranyexcessmoney(calledexcessreserves)canbeusedbythebank tobeloanedout.Sothentheseloansaremadetopurchaseadditionalgoodsand servicesbyconsumersorfirmswhichinevitablywindupbeingdepositedbackinto anotherbankaccount.Thebenefitofafractionalreservebankingsystemisthatit createsanadditionalmoneytobeusedintheeconomythanthatwhichactually exists.however,thissystemonlyworksifthedepositsaregreaterthanthe withdrawals

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Themoneysupplythatwerefertointheeconomyincludesdemanddeposits(or checkingaccountbalances),currency,coins,andtravelerschecksandthisamountis representedbyM1.Other..moneyareassetsofvaluethatcanbeconvertedinto cashrelativelyquicklysuchassavingsaccounts,orcashdepositedforashortamount oftimesuchascertificatesofdepositorevenmanagedcashaccountssuchasmutual fundsthesetypesofothermoneyplustheM1accountsarereferredtoasM2and isgenerallyreferredtoasthesupplyofmoneyinaneconomy.Manyofyouinthis dayandageofelectronicbankingusedebitcardswhicharereallyjustanefficient meansofdemanddepositssothesebalancesarepartofthemoneysupplyhowever, creditcardsarenotpartofthemoneysupplysincetheysimplyrepresenttheability toborrowmoneyfromthecardissuerjustlikeaborrowingmoneyfromabankis consideredaloan.

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Ifagovernmentalpolicyprescriptionistoincreasethequantityofloanablefunds availableintheeconomy,throughtaxpoliciesorsomeotherfiscalincentive..with the desiredoutcomebeingtoincreasetheoverallnumberofsavers,thentheeffectwill beanincreaseinthesupplycurve(ashifttotheright)asitrelatestotheincreasein thenumberofsavers.Thisresultsinanincreaseinthequantityofloanablefunds whichwillputdownwardpressureonthepriceofloanablefundsgiventhroughthe prevailinginterestrate.Ofcoursepoliciesorfundamentalswhichdecreasesaving havetheoppositeeffectonthemarketforloanablefunds;adecreaseinoverall savingswillincreasethepriceofloanablefundsviatheinterestrate,ceterisparibus. ThisisasimplifiedanalysisandwewilldiscusstheroleofCentralBankstoincreaseor decreasethesupplyofloanablefunds.

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Ontheotherhand,ifapolicyoptionisdesignedtoincreasetheborrowingdemands forloanablefundsavailableintheeconomy,throughinvestmentincentivesorsome otherdeterminanttoincreasethenumberofborrowersandaffectoveralleconomic activity,thentheeffectwillbeanincreaseinthedemandcurve(asitrelatestothe increaseinthenumberofborrowers)resultinginanincreaseinthequantityof loanablefunds.Thispolicywillputupwardpressureonthepriceofloanablefunds giventhroughtheprevailinginterestrate.Ofcoursepoliciesorfundamentalswhich decreaseborrowingdemandhavetheoppositeeffectonthemarketforloanable fundswhichtendtodrivedownborrowingcosts(theprevailinginterestratefor borrowers).

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InoneofournextsectionswelldiscusstheframeworkoftheFederalReserveSystem intheUnitedStatesandhowtheycandirectlyaffectoverallinterestratesfor borrowersthroughtheirmonetarypolicyactionsinthebondmarket

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Wow,thinkaboutityouvenowreallybeguntoengageinsomeofourpolicymakers considerationsformacroeconomicactivity.Werenowabouttounderstandhowthe componentsrelatedtomoney,banking,andcreditaffecttheparticipantswithinthe economyitreallyistheunderlyingfundamentalsofsupplyanddemandthatrelate tohowwedefinemoney,itsvalue,itsabilitytosatisfyimmediateconsumption throughthepurchaseofgoodsandservicesorwecanconsidermoneysabilityto deferimmediateutilitythroughitsstoreofvalueandbegintorealizethatnetsavers, throughthemoneysupplyandmarketforloanablefundshaveanincentivetorealize atimevalueofmoneythroughearninginterestratesbytheirdeferredconsumption. Wealsonowrealizehowimportanttheaccesstoloanablefundsbecomesfor agriculturalfirmswhoneedtoinvestinlandandcapitalequipment.Alsoweshould considerthatspecifictoouragriculturalproducers,theavailabilityofcashreserves atthebeginningoftheirproductioncycletopurchaseinputslikeseed,fertilizer,and laborissocriticalandverymuchdependentontheiraccesstoproductionloansthat theycanrepaytotheirfinancialintermediary,whetheritbeafarmcreditorora commercialbank,aftertheyveharvestedtheircropattheendofthegrowing season.EconomicsisafascinatingsubjectandverycomplexIhopeyoureas interestedtocontinueourjourneyaswerelatetheeconomicprinciplestothe farmersandagriculturalagentswhoareresponsibleforsupplyingourfood.Seeyou nexttime!

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