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ECO 285 Money & Banking Basics II. Measurement. Liquidity – How fast, at full market value an asset can be converted into a means of payment. How? - Liquidity of financial assets. M1 = [Coins and] currency in circulation (C) + “transactions deposits” (D) + TC

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eco 285 money banking basics ii
ECO 285Money & BankingBasics II

ECO 285 – Spring 2014 – Dr. D. Foster

measurement
Measurement

Liquidity – How fast, at full market value an asset can be converted into a means of payment.

  • How? - Liquidity of financial assets.
  • M1 = [Coins and] currency in circulation (C) + “transactions deposits” (D) + TC
  • M2 = M1 + (time deposits)S + MMMFIndividual
  • M3 = M2 + TDL + MMMFInstitutional + Euro$ + RP

Cash – perfectly liquid

Diamond ring – not liquid

Money – only interested in financial assets

what banks look like
What Banks Look Like

Reserves(Cash in vault)

T-Bills(Liquid assets)

Loans(Earning assets)

Assets

Liabilities & Equity

Demand Deposits (Checking Accounts)

Equity

M1

Accounting Identity: A  L + E

the monetary base
The Monetary Base
  • Monetary Base (MB) = C + bank reserves (R)
  • Federal Reserve has perfect control over MB:
    • Prints currency.
    • All reserves are currency or deposits at the Fed.
  • The Federal Reserve has less control over M1, M2.
  • MB plays a role in the government’s budget:G = T + Bonds + MB
need a national currency
Need a National Currency?

Dollarization - Use another country’s currency as your medium of exchange.

$ - Ecuador, El Salvador, Timor, British Virgin Islands, Panama

€ - Vatican City, Monaco, Andorra

Currency board- the national currency is backed by an equal amount of a foreign currency.

$ - Hong Kong, Bermuda, East Caribbean $

€ - Bulgaria, Estonia, Lithuania

Currency union - A group of countries adopt a common currency. Euro/West Africa/Caribbean

eco 285 money banking basics ii1
ECO 285Money & BankingBasics II

ECO 285 – Spring 2014 – Dr. D. Foster

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