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©2011 Cengage Learning
Chapter 4MONEY, CREDIT, AND REAL ESTATE
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What is Money?Medium of exchangeMeasure of valueStorage of valueStandard for a deferred payment
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The three types of money :1. Coins2. Paper Currency3. Checking Accounts - called demand deposits
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Money and credit cards are different items.
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Banks Deposits Reserves Loans
Bank A $1,000.00 $200.00 $800.00
Bank B 800.00 160.00 640.00
Bank C 640.00 128.00 640.00
Bank D 512.00 102.40 409.60
Bank E 409.60 81.92 327.68
All other banks together 1,638.40 327.68 1,310.72
Totals $ 5,000 $1,000 $4,000
Money Creation
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The Federal Reserve classifications for money supply:
M1 = coins, paper money, and demand depositsM2 = M1 + items that can quickly be converted
to money M3 = M2 + large CD’s over $100,000
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Too Much Money Can Cause Inflation and Cause Harm!
Two types of InflationDemand-pull: too much
money chasing too few goods & services.
Cost-push: prices rise because production costs are rising.
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©2011 Cengage Learning
The Federal Reserve
Regulates the supply of money and credit, in order to achieve economic growth without inflation and unemployment.
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The Federal Reserve System
Money Supply & DemandToo much money causes interest rates to
drop.Lower interest rates causes increased
borrowing & spending.Increased spending drives up prices.Increased prices can cause inflation.
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Major Federal Reserve ToolsReserve requirement changesOpen-market operationsChanges to discount rate
Allows for Fed control over bank money supply!
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To increase the money supply:The Fed will either decrease the
reserve requirement, buy government securities, decrease the discount rate, or use some combination.
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To decrease the money supplyThe Fed will either increase the
reserve requirements, sell government securities, increase the discount rate, or use some combination.
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Fed Funds Rate vs. Prime RateThe prime rate is the rate of interest that a
bank charges its large, better customers, such as major corporations.
The federal funds rate is what one bank charges another bank for overnight use of excess reserves.
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Tight-Money Policies and Real EstateHigh interest rates can cause funds to flow out of depository institutions
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Disintermediation
The outflow of funds from depository institutions into corporate and government notes.
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Easy-Money Fed Policies and Real EstateIncreasing the money supply during periods of
economic slowdown. Real estate market activity produces an
increase in employment, income, and spending.The real estate market (cycle) in the short run
may move opposite to the general business cycle.
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Policies and Real Estate Tight monetary policy Easy-Money Policy Does The Fed Discriminate Against Housing
When It Tightens Money?
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The Fed’s Emergency PowersWhy is confidence so important to financial
markets?Is an understanding of risk important to
investors, agents, appraisers, and lenders? Why?
Why is liquidity important to financial institutions?
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