Part 15
Monetary Fundamentals
Definition of Money: The most liquid financial assets (e.g., currency and bank deposits).
Barter System: Direct exchange of goods.
Problem: Requires a coincidence of wants (both parties must want what the other has).
Page 5: Functions of Money
Primary Functions:
Medium of Exchange: Widely accepted in exchange for goods/services.
Unit of Account: Provides common measurement of relative value.
Store of Value: Retains value over time.
Page 6: Other Desirable Properties of Money
Money should be:
Scarce, but not overly scarce
Standardized quality
Durable
Portable and divisible
Page 7: Types of Money
Commodity Money: Has intrinsic value (e.g., pure gold/silver).
Fiat Money: Not backed by physical commodities; accepted by law without intrinsic value.
Page 8: Interest Rate Determination
Interest rates are influenced by the demand and supply of money.
Page 9: Demand for Money
Holding money incurs an opportunity cost (foregone interest/profit).
Page 10: Motives for Holding Money
Transactions Motive: Stock to cover predictable daily expenses.
Precautionary Motive: Stock for unexpected expenses.
Speculative Motive: Holding to leverage future asset price changes.
Page 11: Overall Demand for Money
Combination of motives creates overall demand for money.
Inverse relationship exists between money demanded and interest rates.
Conceptualize interest rate as the price of money.
Page 12: Definitions of Money Supply
Four definitions of money supply in Australia:
Monetary base
M1
M3
Broad money
Page 14: Interest Rate Determination Graph
Money Demand Curve (MD): Visualizes inverse relationship between interest rates and money demand.
Supply of Money Curve: Independent of interest rates.
Page 16: Excess Quantity of Money Demanded
Inverse relationship between bond prices and interest rates.
Adjustments to financial portfolios occur when excess money is demanded.
Page 18: Excess Quantity of Money Supply
Adjustments occur when there’s excess money supply, driving bond prices up and interest rates down.
Page 19: Monetary Policy
Actions by central bank to influence economic factors such as interest rates and aggregate demand.
Expansionary Policy: Increases money supply to stimulate economy.
Contractionary Policy: Decreases money supply to curb inflation.
Page 20: Modern Financial System
Facilitates resource transfer from savers to borrowers.
Page 21: Reserve Bank of Australia
Role: Central bank managing monetary policy, payment systems, and financial stability.
Responsible for banking services to federal government and major financial organizations.
Page 22: The Banking System
Description of banks' regulatory needs and operational conduct with the RBA.
Page 23: Fractional Reserve Banking
System where banks keep a percentage of deposits on reserve, creating credit through lending.
Page 25: Money Multiplier
Explains how banks can multiply initial increases in reserves through the money multiplier calculation.
Page 26: Money Markets
Participants: Banks, investment institutes, finance companies.
Instruments: Short-term funds like Treasury notes and commercial bills.
Page 27: Capital Markets
Facilitates the long-term transfer of resources through buying/selling of securities.
Page 28: Australian Securities Exchange (ASX)
Key marketplace for the trading of shares and financial derivatives.
Comparison to other global exchanges.
Page 29: Foreign Exchange Market
Focus on currency transactions and exchanges within global trade activity.