Money and Banking

• Money is a medium of exchange, store of value, unit of account and deferred payment
• Deposits are a liability for the banks
• The reserve ratio is the percentage of deposits that banks must hold in reserve.
• Fractional reserve banking - When the banking some money from the deposits and leave the rest in the reserve
• Barter economy an economy in which there is no medium of exchange : goods are swapped for other goods
• Token money a means of payment whose value or purchasing power as money greatly exceeds its cost of production or value in uses other than as money
• IOU money

  a medium of exchange based on the debt of a private firm or individual
• Cryptocurrency

  a digitally encoded medium of exchange
• The clearing system is the process of interbank settlement of the net flows required between banks as a result
• Liquidity

  the cheapness, speed and certainty with which asset values can be converted back into money
• Bank reserves

  the money that a bank has available to meet possible withdrawals by depositors
• Sight deposits

  money that can be withdrawn ‘on sight’ without prior notice.
• Time deposits

  these deposits, paying higher interest rates, require the depositor to give notice before withdrawing money
• Commercial banks

  financial intermediaries licensed to make loans and issue deposits, including deposits against which cheques can be written and debit cards used
• Financial intermediary

  specializes in bringing lenders and borrowers together
• Reserve ratio

  the ratio of reserves to deposits
•  

  Interest rate spread

  the excess of a loan interest rate over a deposit interest rate
• Money supply

  currency in circulation outside the banking system, plus deposits of commercial banks and building societies
•  

  A financial asset - A piece of paper entitling the owner to a specified stream of income for a specified period
• Bonds - longer -term financial assets, which again can be issued by companies or the government
• Perpetuities - bonds never repurchased by the original issuer who pays interest for ever
• Securitization - the aggregation of individual contracts into bundles of contracts then resold to buyers far removed from the original deal
• Money multiplier

  the ratio of broad money to the monetary base
• The difference between interest rate on loans and interest rate on deposits is called the interest rate - Interest spread
• Open market operation

  occurs when the central bank alters the monetary base by buying or selling financial securities in the open market
• MO- Cash in circulation
• M1 - MO +sight deposits in banks
• M2 - M1 +Banks short term time deposits
• M3 - M2 +Longer term deposits in bank
• M4 - M3 + other deposits
• If the central bank raises the interest rate that banks must pay in order to borrow from the central bank , that will incentivise banks to hold more cash reserves
• Fiat money - Inconvertible paper money that is issued by government order
• Seigniorage - The revenue that accrues to the issuer of money
• Fiat money - Inconvertible paper money that is issued by government order
• Seigniorage - The revenue that accrues to the issuer of money
• Gresham's law - The bad money drives good money out of circulation