out of the money

Examples of out of the money in the following topics:

• Chapter Questions

  • Required reserve ratio equals 5%; the banks hold zero excess reserves, and the public does not withdraw money out of their currency accounts.
  • Calculate the change in the M1 definition of the money supply if the Fed purchases $50,000 in U.S. government securities.
  • Required reserve ratio equals 20%; the banks hold zero excess reserves, and the public does not withdraw money out of their currency accounts.
  • Compute the change in the M1 definition of the money supply if the Fed sells $10,000 in U.S. government securities.
  • Calculate the change in the M1 definition of the money supply if a person deposits $1,000 in cash into his checking account.

• The Definition of Money

  • The value of commodity money comes from the commodity out of which it is made.
  • The commodity itself constitutes the money, and the money is the commodity.
  • Fiduciary money is accepted on the basis of the trust its issuer (the bank) commands.
  • The status of money as legal tender means that money can be used for the discharge of debts.
  • The value of commodity money is derived from the commodity out of which it is made.

• The Money Multiplier in Reality

  • The money multiplier in theory makes a number of assumptions that do not always necessarily hold in the real world.
  • It assumes that people deposit all of their money and banks lend out all of the money they can (they hold no excess reserves).
  • In reality, not all of these are true, meaning that the observed money multiplier rarely conforms to the theoretical money multiplier.
  • In the decades prior to the financial crisis of 2007-2008, this was very rare - banks held next to no excess reserves, lending out the maximum amount possible.
  • In this case, the $1,000 deposit allowed the bank to create $900 of new money, rather than the $10,000 of new money that would be created if the entire loan proceeds were spent.

• The Money Multiplier in Theory

  • The money multiplier measures the maximum amount of commercial bank money that can be created by a given unit of central bank money.
  • The money multiplier measures the maximum amount of commercial bank money that can be created by a given unit of central bank money.
  • The above equation states that the total supply of commercial bank money is, at most, the amount of reserves times the reciprocal of the reserve ratio (the money multiplier) .
  • If banks lend out close to the maximum allowed by their reserves, then the inequality becomes an approximate equality, and commercial bank money is central bank money times the multiplier.
  • In theory banks should always lend out the maximum allowed by their reserves, since they can receive a higher interest rate on loans than they can on money held in reserves.

• The Demand for Money

  • In economics, the demand for money is the desired holding of financial assets in the form of money (cash or bank deposits).
  • Money is necessary in order to carry out transactions.
  • However inherent to the holding of money is the trade-off between the liquidity advantage of holding money and the interest advantage of holding other assets.
  • While the demand of money involves the desired holding of financial assets, the money supply is the total amount of monetary assets available in an economy at a specific time.
  • Relate the level of the interest rate to the demand for money

• Shifts in the Money Demand Curve

  • In economics, the demand for money is the desired holding of financial assets in the form of money.
  • The interest rate is the price of money.
  • The quantity of money demanded increases and decreases with the fluctuation of the interest rate.
  • The demand for money shifts out when the nominal level of output increases.
  • The demand for money is a result of the trade-off between the liquidity advantage of holding money and the interest advantage of holding other assets.

• The Fractional Reserve System

  • Thus, banks can lend out some of their depositors' money, while keeping some on hand to satisfy daily withdrawals by depositors.
  • Because banks are only required to keep a fraction of their deposits in reserve and may loan out the rest, banks are able to create money.
  • In fact, the vast majority of money in the economy today comes from these loans created by banks.
  • However, banks also have an incentive to loan out as much money as possible and keep only a minimum buffer of reserves, since they earn more on these loans than they do on the reserves.
  • Examine the impact of fractional reserve banking on the money supply

• Types of Currency

  • The other part of a nation's money supply consists of bank deposits (sometimes called deposit money), ownership of which can be transferred by means of checks, debit cards, or other forms of money transfer.
  • Money in the form of currency has predominated throughout most of history.
  • Commodity money value comes from the commodity out of which it is made.
  • The use of commodity money is similar to barter, but a commodity money provides a simple and automatic unit of account for the commodity which is being used as money.
  • Banks then lend out the remainder, while maintaining the simultaneous obligation to redeem all these deposits upon demand.

• Other Measurements of the Money Supply

  • In addition to the commonly used M1 and M2 aggregates, several other measures of the money supply are used as well.
  • The different forms of money in the government money supply statistics arise from the practice of fractional-reserve banking.
  • Whenever a bank gives out a loan in a fractional-reserve banking system, a new sum of money is created.
  • This new type of money is what makes up the non-M0 components in the M1-M3 statistics.
  • The measures of the money supply are all related, but the use of different measures may lead economists to different conclusions.

• Example Transactions Showing How a Bank Can Create Money

  • The amount of money created by banks depends on the size of the deposit and the money multiplier.
  • To understand the process of money creation, let us create a hypothetical system of banks.
  • Anderson will loan out the maximum amount (90%) and hold the required 10% as reserves.
  • Even though only $1,000 were added to the system, the amount of money in the system increased by $1,900.
  • The graph shows the total amount of money that can be created with the addition of $100 in reserves, using different reserve requirements as examples.