GROUP 9

Macroeconomics

Caburong, Alison Jane

Daco, Gabriel George
Mesa, Nashreen
Reyes, Celine
Villaruel, Nellene Joyce
BSA 2-11

Money buys goods and goods buy money but in a monetary economy goods do not buy
goods. Really, without money the world would not go around. -Professor Bob Clower.

MONETARY ECONOMICS
Monetary economics is a branch of economics that provides a
framework for analyzing money in its functions as a medium of exchange,
store of value, and unit of account. It considers how money, for example
fiat currency, can gain acceptance purely because of its convenience as a
public good. It is also concerned with the effects of monetary institutions
and policy on economic variables including commodity prices, wages,
interest rates, quantities of employment, consumption, and production.
The study of monetary economics enables us to understand not just
how an economy functions efficiently but also how monetary policy can
help the economy adjust from one state to another and how it can find
balance and grow.
MONETARY BASE AND MONEY MULTIPLIER
The monetary base is simply money, whether it is currency or
reserves. It is the portion of the commercial banks' reserves that are
maintained in accounts with their central bank plus the
total currency circulating in the public (which includes the currency, also
known as vault cash, that is physically held in the banks' vault).

Monetary Base = Currency + Bank Reserves

The money multiplier is the number of times that the monetary base
is used in transactions. A money multiplier is one of various closely
related ratios of commercial bank money to central bank money under
a fractional-reserve bankingsystem.
Money Supply = Monetary Base Money Multiplier
BANK RESERVES
Bank reserves are the currency deposits that are not lent out to a
bank's clients. A small fraction of the total deposits is held internally by
the bank in cash vaults or deposited with the central bank. Minimum
reserve requirements are established by central banks in order to ensure
that the financial institutions will be able to provide clients with cash upon
request.

The amount of bank reserves relative to total deposits is a measure

used to assess a bank's risk. The higher the bank reserves are, the less
risk-taking a bank is and vice versa. Central banks (such as the Federal
Reserve or the Fed in the US) requires banks to maintain a certain
percentage of their total bank deposits as required reserves. According to
the Federal Reserve Board's regulation, the required reserves represent
the amount of funds a bank must hold in its cash vault or deposit with the
central bank against certain liabilities.
Required Reserves = required reserves ratio Bank
Deposits
The amount by which bank reserves exceeds required reserves is
called excess reserves. Banks typically keep excess reserves at a
minimum, because these reserves do not earn any interest.
FEDERAL RESERVE
Federal Reserve is the Central bank of the United States. It was
founded by Congress in 1913 to prove the nation with a safer, more
flexible, and more stable monetary and financial system.
Today, the Federal Reserves duties fall into four general areas: (1)
conducting the nations monetary policy; (2) supervising and regulating
banking institutions and protecting the credit rights of consumers; (3)
maintaining the stability of financial system; and (4) providing certain
financial services to the U.S. government, the public, financial institutions,
and foreign official institutions.
BALANCE SHEET
A central bank's balance sheet, like most balance sheets, is divided
into assets and liabilities. The central bank's balance sheet can also be
divided further into assets and liabilities as the bankers' bank and assets
and liabilities as the government's bank