Chapter 13

• Money supply:

  M1: currency and transactional bank deposits, the most liquid funds

  M3: M1 + non transactional bank deposits (such as a fixed payrate)

  Broad money: M3 + NBFI deposits - NBFI deposits in banks

  • NBFI: Non-bank financial intermediaries
• M3 is an important measure for the economy as it unveils the currency that is in circulation and all private sector deposit in banks, leading to the cash rate target.
• Money is:

  • a store of value
  • a method of repayment
  • a transactional method
  • a method of deferred payment
• Factors that affect supply and demand of funds:

  Liquidity:

  • transactional motives: for day-to-day transactional purposes
  • Precautionary motives: for unpredictable circumstances
  • speculative motives: for a possibility to make a gain/loss
• Liquidity is how easily funds/assets can be converted to currency for ease of transactionality for the individual.
• Interest rates in banks will always be higher for loan-taking than depositing/saving in the bank. This is because a bank's goals are similar to a businesses' main goals; one of them being maximising profits.
• A motivator for investment in foreign banks may be the return-back interest on savings.
• The policy rate corridor is the interest the bank receive/pay when borrowing/depositing funds in the ES account. This is regulated by the RBA and it regulates the interest levels in the economy. This interest rate is the same; remaining at 0.25%, creating an upwards and downwards pressure in the market, keeping the cash rate constant.
• ES: exchange settlement
• Banks don't tend to save in the ES accounts since more profit can be made through investment. It's the "dumb lazy" route - Mr. Fox
• Tightening the monetary policy: expanding the policy rate corridor, loans have a higher return-back as the cash rate drops, meaning banks increase their interest rate for loans, meaning people's expendable income would be lowered, so less business activty; less economic activity.
• Loosening of monetary policy: the RBA decreases the policy rate corridor, leading to lower interest on loans for banks to expend on, leading to the banks decreasing interest for loans in the general population. This leds to higher economic activity
• The banks are not very interested in depositing money and gaining profits off that, however, it still creates a pressure high enough for the policy interest rate corridor to reach the cash rate target.

  
  

  When the RBA raises this, the interest rate for deposits increases, leading to banks more likely to keep excess funds, not contributing to the economy.

  
  

  When the policy rate corridor decreases, interest back on deposits do too, meaning banks are better off investing in the economy.
• The cash rate is an interest paid on overnight loans in the short-term money market.
• NBFI: non bank financial intermediaries