© 2005 mcgraw-hill ryerson ltd. macroeconomics, chapter 11 1 money and banking slides prepared by...
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© 2005 McGraw-Hill Ryerson Ltd.© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 11Macroeconomics, Chapter 11 11
Money and BankingMoney and BankingMoney and BankingMoney and Banking
SLIDES PREPARED BY JUDITH SKUCE, GEORGIAN COLLEGESLIDES PREPARED BY JUDITH SKUCE, GEORGIAN COLLEGE
© 2005 McGraw-Hill Ryerson Ltd.© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 11Macroeconomics, Chapter 11 22
In this chapter you will learnIn this chapter you will learnIn this chapter you will learnIn this chapter you will learn
11.111.1 The definition and functions of money The definition and functions of money11.211.2 What constitutes the supply of money What constitutes the supply of money11.311.3 What backs Canada’s money supply What backs Canada’s money supply11.411.4 The components of money demand The components of money demand11.511.5 How the equilibrium interest rate is How the equilibrium interest rate is
determined in the money marketdetermined in the money market11.611.6 About the structure of the Canadian About the structure of the Canadian
financial systemfinancial system11.711.7 About recent developments in money and About recent developments in money and
bankingbanking
© 2005 McGraw-Hill Ryerson Ltd.© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 11Macroeconomics, Chapter 11 33
Chapter 11 TopicsChapter 11 TopicsChapter 11 TopicsChapter 11 Topics
11.111.1 The Definition & Functions of Money The Definition & Functions of Money
11.211.2 The Supply of Money The Supply of Money
11.311.3 What “Backs” the Money Supply? What “Backs” the Money Supply?
11.411.4 The Demand for Money The Demand for Money
11.511.5 Equilibrium in the Money Market Equilibrium in the Money Market
11.611.6 The Canadian Financial System The Canadian Financial System
11.711.7 Recent Developments in Money & Banking Recent Developments in Money & Banking
© 2005 McGraw-Hill Ryerson Ltd.© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 11Macroeconomics, Chapter 11 44
The Definition & Functions of The Definition & Functions of MoneyMoney
The Definition & Functions of The Definition & Functions of MoneyMoney
Money is what money doesMoney is what money does
© 2005 McGraw-Hill Ryerson Ltd.© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 11Macroeconomics, Chapter 11 55
The Definition & Functions of The Definition & Functions of MoneyMoney
The Definition & Functions of The Definition & Functions of MoneyMoney
Medium of exchangeMedium of exchange
© 2005 McGraw-Hill Ryerson Ltd.© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 11Macroeconomics, Chapter 11 66
Medium of exchangeMedium of exchange Measure of valueMeasure of value
The Definition & Functions of The Definition & Functions of MoneyMoney
The Definition & Functions of The Definition & Functions of MoneyMoney
© 2005 McGraw-Hill Ryerson Ltd.© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 11Macroeconomics, Chapter 11 77
Medium of exchangeMedium of exchange Measure of valueMeasure of value Store of valueStore of value
The Definition & Functions of The Definition & Functions of MoneyMoney
The Definition & Functions of The Definition & Functions of MoneyMoney
© 2005 McGraw-Hill Ryerson Ltd.© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 11Macroeconomics, Chapter 11 88
Chapter 11 TopicsChapter 11 TopicsChapter 11 TopicsChapter 11 Topics
11.111.1 The Definition & Functions of Money The Definition & Functions of Money
11.211.2 The Supply of Money The Supply of Money
11.311.3 What “Backs” the Money Supply? What “Backs” the Money Supply?
11.411.4 The Demand for Money The Demand for Money
11.511.5 Equilibrium in the Money Market Equilibrium in the Money Market
11.611.6 The Canadian Financial System The Canadian Financial System
11.711.7 Recent Developments in Money & Banking Recent Developments in Money & Banking
© 2005 McGraw-Hill Ryerson Ltd.© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 11Macroeconomics, Chapter 11 99
Currency (coins & paper money)
plus Demand depositsequals M1M1
(billions of dollars)December, 2002December, 2002
The Supply of MoneyThe Supply of MoneyThe Supply of MoneyThe Supply of MoneyTable 11-1Table 11-1
M1M1137.3
© 2005 McGraw-Hill Ryerson Ltd.© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 11Macroeconomics, Chapter 11 1010
The Supply of MoneyThe Supply of MoneyThe Supply of MoneyThe Supply of Money
Currency: Coins + Paper MoneyCurrency: Coins + Paper Money• token moneytoken money• Bank of Canada notesBank of Canada notes
Demand DepositsDemand Deposits• about about ⅔ of M1 ⅔ of M1
Institutions That Offer Demand DepositsInstitutions That Offer Demand Deposits• chartered banks are the primary depository chartered banks are the primary depository
institutionsinstitutions
© 2005 McGraw-Hill Ryerson Ltd.© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 11Macroeconomics, Chapter 11 1111
The Supply of MoneyThe Supply of MoneyThe Supply of MoneyThe Supply of Money
Near-moniesNear-monies• nonchequable savings depositsnonchequable savings deposits• term depositsterm deposits
© 2005 McGraw-Hill Ryerson Ltd.© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 11Macroeconomics, Chapter 11 1212
Currency (coins & paper money)
plus Demand depositsequals M1M1 plus Personal savings deposits,
plus Non-personal notice depositsequals M2M2
The Supply of MoneyThe Supply of MoneyThe Supply of MoneyThe Supply of MoneyTable 11-1Table 11-1
(billions of dollars)December, 2002December, 2002
M1M1137.3
M2M2
559.8
© 2005 McGraw-Hill Ryerson Ltd.© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 11Macroeconomics, Chapter 11 1313
The Supply of MoneyThe Supply of MoneyThe Supply of MoneyThe Supply of Money
M2+ is M2 plusM2+ is M2 plus• deposits at trust & mortgage loan deposits at trust & mortgage loan
companiescompanies• deposits at caisses populaires & credit deposits at caisses populaires & credit
unions & other non-bank deposit-taking unions & other non-bank deposit-taking institutionsinstitutions
• money market mutual fundsmoney market mutual funds
© 2005 McGraw-Hill Ryerson Ltd.© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 11Macroeconomics, Chapter 11 1414
Currency (coins & paper money)
plus Demand depositsequals M1M1 plus Personal savings deposits,
plus Nonpersonal notice depositsequals M2M2 plus Deposits: Other intermediaries
equals M2+M2+
M1M1 M2+M2+
801.8
M2M2
The Supply of MoneyThe Supply of MoneyThe Supply of MoneyThe Supply of MoneyTable 11-1Table 11-1
(billions of dollars)December, 2002December, 2002
559.8
137.3
© 2005 McGraw-Hill Ryerson Ltd.© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 11Macroeconomics, Chapter 11 1515
The Supply of MoneyThe Supply of MoneyThe Supply of MoneyThe Supply of Money
we will use the narrow M1 definition of we will use the narrow M1 definition of money, unless stated otherwisemoney, unless stated otherwise
© 2005 McGraw-Hill Ryerson Ltd.© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 11Macroeconomics, Chapter 11 1616
Chapter 11 TopicsChapter 11 TopicsChapter 11 TopicsChapter 11 Topics
11.111.1 The Definition & Functions of Money The Definition & Functions of Money
11.211.2 The Supply of Money The Supply of Money
11.311.3 What “Backs” the Money Supply? What “Backs” the Money Supply?
11.411.4 The Demand for Money The Demand for Money
11.511.5 Equilibrium in the Money Market Equilibrium in the Money Market
11.611.6 The Canadian Financial System The Canadian Financial System
11.711.7 Recent Developments in Money & Banking Recent Developments in Money & Banking
© 2005 McGraw-Hill Ryerson Ltd.© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 11Macroeconomics, Chapter 11 1717
What “Backs” the Money Supply?What “Backs” the Money Supply?What “Backs” the Money Supply?What “Backs” the Money Supply?
Money as DebtMoney as Debt Value of MoneyValue of Money
• AcceptabilityAcceptability• Legal TenderLegal Tender• Relative ScarcityRelative Scarcity
© 2005 McGraw-Hill Ryerson Ltd.© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 11Macroeconomics, Chapter 11 1818
What “Backs” the Money Supply?What “Backs” the Money Supply?What “Backs” the Money Supply?What “Backs” the Money Supply?
Money & PricesMoney & Prices• The Purchasing Power of the DollarThe Purchasing Power of the Dollar
NOTES:ReciprocalReciprocal relationshipbetween the price leveland the value of thedollar
D =1
P
© 2005 McGraw-Hill Ryerson Ltd.© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 11Macroeconomics, Chapter 11 1919
What “Backs” the Money Supply?What “Backs” the Money Supply?What “Backs” the Money Supply?What “Backs” the Money Supply?
Money & PricesMoney & Prices• The Purchasing Power of the DollarThe Purchasing Power of the Dollar• Inflation & AcceptabilityInflation & Acceptability
© 2005 McGraw-Hill Ryerson Ltd.© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 11Macroeconomics, Chapter 11 2020
Chapter 11 TopicsChapter 11 TopicsChapter 11 TopicsChapter 11 Topics
11.111.1 The Definition & Functions of Money The Definition & Functions of Money
11.211.2 The Supply of Money The Supply of Money
11.311.3 What “Backs” the Money Supply? What “Backs” the Money Supply?
11.411.4 The Demand for Money The Demand for Money
11.511.5 Equilibrium in the Money Market Equilibrium in the Money Market
11.611.6 The Canadian Financial System The Canadian Financial System
11.711.7 Recent Developments in Money & Banking Recent Developments in Money & Banking
© 2005 McGraw-Hill Ryerson Ltd.© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 11Macroeconomics, Chapter 11 2121
The Demand for MoneyThe Demand for MoneyThe Demand for MoneyThe Demand for Money
Transactions Demand, DTransactions Demand, Dtt
• demand for money as a medium of demand for money as a medium of exchangeexchange
• varies directly with GDPvaries directly with GDP
Asset Demand, DAsset Demand, Daa
• demand for money as a store of valuedemand for money as a store of value• varies inversely with the interest ratevaries inversely with the interest rate
© 2005 McGraw-Hill Ryerson Ltd.© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 11Macroeconomics, Chapter 11 2222
The Demand For MoneyThe Demand For MoneyTransactionsDemand, Dt +
Inte
rest
Rat
e
Amount of moneydemanded (billions
of dollars)
Dt
10
7.5
5
2.5
00 50 100 150 200 250 300
i%
Figure 11-1Figure 11-1
© 2005 McGraw-Hill Ryerson Ltd.© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 11Macroeconomics, Chapter 11 2323
TransactionsDemand, Dt
AssetDemand, Da+ =
Amount of moneydemanded (billions
of dollars)
10
7.5
5
2.5
0Da
0 50 100 150 200 250 300
Amount of moneydemanded (billions
of dollars)
Dt
10
7.5
5
2.5
00 50 100 150 200 250 300
i% i%
Inte
rest
Rat
e
The Demand For MoneyThe Demand For MoneyFigure 11-1Figure 11-1
© 2005 McGraw-Hill Ryerson Ltd.© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 11Macroeconomics, Chapter 11 2424
TransactionsDemand, Dt
AssetDemand, Da
Total demandfor money, Dm+ =
10
7.5
5
2.5
0
Amount of moneydemanded (billions
of dollars)
10
7.5
5
2.5
0Da
0 50 100 150 200 250 300
Amount of moneydemanded (billions
of dollars)
Dt
10
7.5
5
2.5
00 50 100 150 200 250 300
Amount of moneydemanded (billions
of dollars)
0 50 100 150 200 250 300
Dm
i% i% i%
100 + 100 = 200100 + 100 = 200
Inte
rest
Rat
e
The Demand For MoneyThe Demand For MoneyFigure 11-1Figure 11-1
© 2005 McGraw-Hill Ryerson Ltd.© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 11Macroeconomics, Chapter 11 2525
Chapter 11 TopicsChapter 11 TopicsChapter 11 TopicsChapter 11 Topics
11.111.1 The Definition & Functions of Money The Definition & Functions of Money
11.211.2 The Supply of Money The Supply of Money
11.311.3 What “Backs” the Money Supply? What “Backs” the Money Supply?
11.411.4 The Demand for Money The Demand for Money
11.511.5 Equilibrium in the Money Market Equilibrium in the Money Market
11.611.6 The Canadian Financial System The Canadian Financial System
11.711.7 Recent Developments in Money & Banking Recent Developments in Money & Banking
© 2005 McGraw-Hill Ryerson Ltd.© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 11Macroeconomics, Chapter 11 2626
Equilibrium in the Money Equilibrium in the Money MarketMarket
Equilibrium in the Money Equilibrium in the Money MarketMarket
demand for money combined with demand for money combined with supply of money portrays the money supply of money portrays the money marketmarket
© 2005 McGraw-Hill Ryerson Ltd.© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 11Macroeconomics, Chapter 11 2727
TransactionsDemand, Dt
AssetDemand, Da
Total demandfor money, Dm+ =
10
7.5
5
2.5
0
Amount of moneydemanded (billions
of dollars)
10
7.5
5
2.5
0Da
0 50 100 150 200 250 300 Amount of money
demanded (billionsof dollars)
Dt
10
7.5
5
2.5
00 50 100 150 200 250 300
Amount of moneydemanded (billions
of dollars)
0 50 100 150 200 250 300
i% i% i%
ADD THEADD THEMONEY SUPPLYMONEY SUPPLY
TO FIND THETO FIND THEEQUILIBRIUM RATEEQUILIBRIUM RATE
OF INTERESTOF INTEREST
ADD THEADD THEMONEY SUPPLYMONEY SUPPLY
TO FIND THETO FIND THEEQUILIBRIUM RATEEQUILIBRIUM RATE
OF INTERESTOF INTEREST
Inte
rest
Rat
e
The Demand For MoneyThe Demand For MoneyFigure 11-1Figure 11-1
Dm
© 2005 McGraw-Hill Ryerson Ltd.© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 11Macroeconomics, Chapter 11 2828
TransactionsDemand, Dt
AssetDemand, Da
Total demandfor money, Dm+ =
10
7.5
5
2.5
0
Amount of moneydemanded (billions
of dollars)
10
7.5
5
2.5
0Da
0 50 100 150 200 250 300
Amount of moneydemanded (billions
of dollars)
Dt
10
7.5
5
2.5
00 50 100 150 200 250 300
Amount of moneydemanded (billions
of dollars)
0 50 100 150 200 250 300
i% i% i%Sm
ie
EquilibriumEquilibriumInterest RateInterest Rate
Inte
rest
Rat
e
The Demand For MoneyThe Demand For MoneyFigure 11-1Figure 11-1
Dm
© 2005 McGraw-Hill Ryerson Ltd.© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 11Macroeconomics, Chapter 11 2929
Adjustment to a Decline in the Adjustment to a Decline in the Money SupplyMoney Supply
Adjustment to a Decline in the Adjustment to a Decline in the Money SupplyMoney Supply
A decline in the supply of money will A decline in the supply of money will create a temporary shortage of money create a temporary shortage of money & increase the equilibrium interest rate& increase the equilibrium interest rate
© 2005 McGraw-Hill Ryerson Ltd.© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 11Macroeconomics, Chapter 11 3030
The Money MarketThe Money Market
Ra
te o
f in
tere
st,
i (p
erce
nt)
Amount of money demanded(billions of dollars)
10
7.5
5
2.5
0
Sm
Dm
ie
Suppose the moneySuppose the moneysupply is decreasedsupply is decreasedfrom $200 billion, Sfrom $200 billion, Sm,m,
to $150 billion Sto $150 billion Sm1m1
0 50 100 150 200 250 300
Figure 11-2Figure 11-2
© 2005 McGraw-Hill Ryerson Ltd.© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 11Macroeconomics, Chapter 11 3131
Amount of money demanded(billions of dollars)
0 50 100 150 200 250 300
10
7.5
5
2.5
0
Dm
ie
Sm
A temporary A temporary shortageshortageof money will requireof money will requirethe sale of some assetsthe sale of some assetsto meet the needto meet the need
Sm1
Ra
te o
f in
tere
st,
i (p
erce
nt)
The Money MarketThe Money MarketFigure 11-2Figure 11-2
© 2005 McGraw-Hill Ryerson Ltd.© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 11Macroeconomics, Chapter 11 3232
Amount of money demanded(billions of dollars)
0 50 100 150 200 250 300
10
7.5
5
2.5
0
Dm
ie
Sm
A temporary A temporary shortageshortageof money will requireof money will requirethe sale of some assetsthe sale of some assetsto meet the needto meet the need
Sm1
Ra
te o
f in
tere
st,
i (p
erce
nt)
The Money MarketThe Money MarketFigure 11-2Figure 11-2
Everyone sells bondsEveryone sells bonds bond prices fallbond prices fall
interest rates riseinterest rates riseillustrated…illustrated…
Everyone sells bondsEveryone sells bonds bond prices fallbond prices fall
interest rates riseinterest rates riseillustrated…illustrated…
© 2005 McGraw-Hill Ryerson Ltd.© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 11Macroeconomics, Chapter 11 3333
BondsBondsBondsBonds
a $1,000 bond @ 5% pays $50 annuallya $1,000 bond @ 5% pays $50 annually if you buy this bond for $667, you still receive if you buy this bond for $667, you still receive
$50 annually$50 annually what is your effective interest rate?what is your effective interest rate? 50/667=7.5%50/667=7.5%
the lower the the lower the bond price,bond price,
the higher the the higher the interest rateinterest rate
the lower the the lower the bond price,bond price,
the higher the the higher the interest rateinterest rate
© 2005 McGraw-Hill Ryerson Ltd.© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 11Macroeconomics, Chapter 11 3434
Amount of money demanded(billions of dollars)
0 50 100 150 200 250 300
10
7.5
5
2.5
0
Dm
ie
Sm
A temporary A temporary shortageshortageof money will requireof money will requirethe sale of some assetsthe sale of some assetsto meet the needto meet the need
Sm1
Ra
te o
f in
tere
st,
i (p
erce
nt)
The Money MarketThe Money MarketFigure 11-2Figure 11-2
Everyone sells bondsEveryone sells bondsbond prices fallbond prices fall
interest rates riseinterest rates riseuntil people are happyuntil people are happy
holding the lowerholding the lowerquantity of moneyquantity of money
Everyone sells bondsEveryone sells bondsbond prices fallbond prices fall
interest rates riseinterest rates riseuntil people are happyuntil people are happy
holding the lowerholding the lowerquantity of moneyquantity of money
© 2005 McGraw-Hill Ryerson Ltd.© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 11Macroeconomics, Chapter 11 3535
Amount of money demanded(billions of dollars)
10
7.5
5
2.5
0
Dm
ie
After adjustments toAfter adjustments toasset holdings, a newasset holdings, a newequilibrium will beequilibrium will beseen at a higher levelseen at a higher levelof interestof interest
Sm1
0 50 100 150 200 250 300
Ra
te o
f in
tere
st,
i (p
erce
nt) Sm
The Money MarketThe Money MarketFigure 11-2Figure 11-2
© 2005 McGraw-Hill Ryerson Ltd.© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 11Macroeconomics, Chapter 11 3636
Adjustment to an Increase in Adjustment to an Increase in the Money Supplythe Money Supply
Adjustment to an Increase in Adjustment to an Increase in the Money Supplythe Money Supply
An increase in the supply of money will An increase in the supply of money will create a temporary surplus of money & create a temporary surplus of money & decrease the equilibrium interest ratedecrease the equilibrium interest rate
© 2005 McGraw-Hill Ryerson Ltd.© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 11Macroeconomics, Chapter 11 3737
Amount of money demanded(billions of dollars)
10
7.5
5
2.5
0
Dm
ie
Sm
0 50 100 150 200 250 300
Suppose the money Suppose the money supplysupply
is increased from is increased from
$200 billion, S$200 billion, Sm1m1,, to to
$250 billion S$250 billion Sm2m2
Ra
te o
f in
tere
st,
i (p
erce
nt)
The Money MarketThe Money MarketFigure 11-2Figure 11-2
© 2005 McGraw-Hill Ryerson Ltd.© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 11Macroeconomics, Chapter 11 3838
Amount of money demanded(billions of dollars)
10
7.5
5
2.5
0
Dm
Sm
0 50 100 150 200 250 300
Sm2 A temporary A temporary surplus surplus of money of money
will requirewill requirethe purchase of the purchase of some assets to some assets to
meet the desired meet the desired level of liquiditylevel of liquidity
Ra
te o
f in
tere
st,
i (p
erce
nt)
The Money MarketThe Money MarketFigure 11-2Figure 11-2
© 2005 McGraw-Hill Ryerson Ltd.© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 11Macroeconomics, Chapter 11 3939
BondsBondsBondsBonds
a $1,000 bond @ 5% pays $50 annuallya $1,000 bond @ 5% pays $50 annually if you buy this bond for $2000, you still if you buy this bond for $2000, you still
receive $50 annuallyreceive $50 annually what is your effective interest rate?what is your effective interest rate? 50/2000=2.5%50/2000=2.5%
the higher the the higher the bond price,bond price,
the lower the the lower the interest rateinterest rate
the higher the the higher the bond price,bond price,
the lower the the lower the interest rateinterest rate
© 2005 McGraw-Hill Ryerson Ltd.© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 11Macroeconomics, Chapter 11 4040
Amount of money demanded(billions of dollars)
10
7.5
5
2.5
0
Dm
Sm
0 50 100 150 200 250 300
Sm2 A temporary A temporary surplus surplus of money of money
will requirewill requirethe purchase of the purchase of some assets to some assets to
meet the desired meet the desired level of liquiditylevel of liquidity
Ra
te o
f in
tere
st,
i (p
erce
nt)
The Money MarketThe Money MarketFigure 11-2Figure 11-2
Everyone buys bondsEveryone buys bondsbond prices risebond prices riseinterest rates fallinterest rates fall
until people are happyuntil people are happyholding the higherholding the higherquantity of moneyquantity of money
Everyone buys bondsEveryone buys bondsbond prices risebond prices riseinterest rates fallinterest rates fall
until people are happyuntil people are happyholding the higherholding the higherquantity of moneyquantity of money
© 2005 McGraw-Hill Ryerson Ltd.© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 11Macroeconomics, Chapter 11 4141
Amount of money demanded(billions of dollars)
10
7.5
5
2.5
0Dm
ie
Sm2
0 50 100 150 200 250 300
After After adjustments toadjustments to
asset holdings, a asset holdings, a newnew
equilibrium will equilibrium will bebe
seen at a lower seen at a lower levellevel
of interestof interest
Ra
te o
f in
tere
st,
i (p
erce
nt) Sm
The Money MarketThe Money MarketFigure 11-2Figure 11-2
© 2005 McGraw-Hill Ryerson Ltd.© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 11Macroeconomics, Chapter 11 4242
Chapter 11 TopicsChapter 11 TopicsChapter 11 TopicsChapter 11 Topics
11.111.1 The Definition & Functions of Money The Definition & Functions of Money
11.211.2 The Supply of Money The Supply of Money
11.311.3 What “Backs” the Money Supply? What “Backs” the Money Supply?
11.411.4 The Demand for Money The Demand for Money
11.511.5 Equilibrium in the Money Market Equilibrium in the Money Market
11.611.6 The Canadian Financial System The Canadian Financial System
11.711.7 Recent Developments in Money & Banking Recent Developments in Money & Banking
© 2005 McGraw-Hill Ryerson Ltd.© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 11Macroeconomics, Chapter 11 4343
The Canadian Financial The Canadian Financial SystemSystem
The Canadian Financial The Canadian Financial SystemSystem
The Evolution of the Canadian Banking The Evolution of the Canadian Banking SystemSystem• 20032003
– 16 domestically owned banks16 domestically owned banks– 33 foreign bank subsidiaries33 foreign bank subsidiaries– 20 foreign bank branches20 foreign bank branches
• big six banks have 90% of total banking big six banks have 90% of total banking assets & 75% of payments volumeassets & 75% of payments volume
• mergers may lead to more concentrationmergers may lead to more concentration
© 2005 McGraw-Hill Ryerson Ltd.© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 11Macroeconomics, Chapter 11 4444
Table 11-2Table 11-2The Balance Sheet of Canadian Chartered BanksThe Balance Sheet of Canadian Chartered Banks
December 2002 ($ Billions)December 2002 ($ Billions)
AssetsAssets LiabilitiesLiabilities
ReservesReserves 0.50.5 Demand depositsDemand deposits 97.297.2
LoansLoans 688.8688.8 Savings depositsSavings deposits 131.1131.1
Gov’t. of Canada Gov’t. of Canada securitiessecurities
76.776.7 Term depositsTerm deposits 240.9240.9
Foreign-currency Foreign-currency assetsassets
40.040.0 Foreign-currency Foreign-currency liabilitiesliabilities
76.976.9
Gov’t of CanadaGov’t of Canada 2.02.0
Other Other 235.1235.1 OtherOther 493.0493.0
TotalTotal 1,041.11,041.1 TotalTotal 1.041.11.041.1
© 2005 McGraw-Hill Ryerson Ltd.© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 11Macroeconomics, Chapter 11 4545
Assets (Canadian $ billions, 2002)Assets (Canadian $ billions, 2002)
Mizuho Holdings (Japan)Mizuho Holdings (Japan) $1,876,772$1,876,772
Citigroup (U.S.)Citigroup (U.S.) 1,674,7501,674,750
Sumitomo Mitsui (Japan)Sumitomo Mitsui (Japan) 1,338,4001,338,400
Deutsche Bank (Germany)Deutsche Bank (Germany) 1,288,9261,288,926
Mitsubishi Tokyo (Japan)Mitsubishi Tokyo (Japan) 1,196,9571,196,957
Royal Bank of CanadaRoyal Bank of Canada 351,042351,042
Canadian Imperial Bank of CommerceCanadian Imperial Bank of Commerce 280,447280,447
TD Canada TrustTD Canada Trust 279,788279,788
ScotiabankScotiabank 276,162276,162
Bank of MontrealBank of Montreal 232,362232,362
National Bank of CanadaNational Bank of Canada 72,44772,447
GLOBAL PERSPECTIVE 11.1GLOBAL PERSPECTIVE 11.1
© 2005 McGraw-Hill Ryerson Ltd.© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 11Macroeconomics, Chapter 11 4646
The Canadian Financial The Canadian Financial SystemSystem
The Canadian Financial The Canadian Financial SystemSystem
Canada’s Chartered BanksCanada’s Chartered Banks• fractional reserve systemfractional reserve system
Making LoansMaking Loans Other Financial IntermediariesOther Financial Intermediaries Cheque ClearingCheque Clearing
© 2005 McGraw-Hill Ryerson Ltd.© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 11Macroeconomics, Chapter 11 4747
Chapter 11 TopicsChapter 11 TopicsChapter 11 TopicsChapter 11 Topics
11.111.1 The Definition & Functions of Money The Definition & Functions of Money
11.211.2 The Supply of Money The Supply of Money
11.311.3 What “Backs” the Money Supply? What “Backs” the Money Supply?
11.411.4 The Demand for Money The Demand for Money
11.511.5 Equilibrium in the Money Market Equilibrium in the Money Market
11.611.6 The Canadian Financial System The Canadian Financial System
11.711.7 Recent Developments in Money & Banking Recent Developments in Money & Banking
© 2005 McGraw-Hill Ryerson Ltd.© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 11Macroeconomics, Chapter 11 4848
Recent Developments in Recent Developments in Money & BankingMoney & Banking
Recent Developments in Recent Developments in Money & BankingMoney & Banking
Expansion of ServicesExpansion of Services• new productsnew products• minibanksminibanks• ABMsABMs• debit cards, phone banking, Internet debit cards, phone banking, Internet
bankingbanking
© 2005 McGraw-Hill Ryerson Ltd.© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 11Macroeconomics, Chapter 11 4949
Recent Developments in Recent Developments in Money & BankingMoney & Banking
Recent Developments in Recent Developments in Money & BankingMoney & Banking
Expansion of ServicesExpansion of Services Globalization of Financial MarketsGlobalization of Financial Markets
© 2005 McGraw-Hill Ryerson Ltd.© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 11Macroeconomics, Chapter 11 5050
Recent Developments in Recent Developments in Money & BankingMoney & Banking
Recent Developments in Recent Developments in Money & BankingMoney & Banking
Expansion of ServicesExpansion of Services Globalization of Financial MarketsGlobalization of Financial Markets Electronic TransactionsElectronic Transactions
© 2005 McGraw-Hill Ryerson Ltd.© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 11Macroeconomics, Chapter 11 5151
Chapter 11 TopicsChapter 11 TopicsChapter 11 TopicsChapter 11 Topics
11.111.1 The Definition & Functions of Money The Definition & Functions of Money
11.211.2 The Supply of Money The Supply of Money
11.311.3 What “Backs” the Money Supply? What “Backs” the Money Supply?
11.411.4 The Demand for Money The Demand for Money
11.511.5 Equilibrium in the Money Market Equilibrium in the Money Market
11.611.6 The Canadian Financial System The Canadian Financial System
11.711.7 Recent Developments in Money & Banking Recent Developments in Money & Banking