14.1 Concept and types of monetary systems

Monetary system - is an organized form of currency in the country, that is, the movement of money in the domestic turnover of cash and non-cash, serving the sale of goods, the movement of loan capital and fictitious. It includes: currency, the scale of prices, types of money emission system - legally established currency issue, the state apparatus, which regulates the circulation of money.

Money is one of the commodities that are specific property which is the ability to exchange for another commodity. In the economic literature, this property is called liquidity. She's the greatest of money compared to other products that give them the character of a universal equivalent.

In any economic system is currently the main types of money are:

- Notes, i.e. paper money:

- Small change ("change").

This central money, which is responsible for issuing state.

As part of the goods sold is always in debt, under the bill, that any credit money issued by issued by issuing bank.

Banknotes - bank notes issued by issuing banks.

Promissory notes - debt (1 - 3 months), which gives the holder the right to demand payment of this amount by the deadline.

Cheque deposits, checks - a means of transferring ownership of the deposits in banks or other financial institutions. Money is not the write checks, and any demand deposits (deposits) in the bank.

In developed market economies deposits are more important than the paper money - up to 90% of trading is payable by check or by credit card. The use of credit cards ("e-money") requires a high level of computerization of banks, trade and service.

14.2 The demand for money and money supply

Based on the nature of money - their ability to communicate to all other commodities, they are formed by supply and demand.

Demand for money (total) consists of two components:

A) The demand for money for transactions;

B) The demand for money by assets

А . The demand for money for transactions is proportional to nominal GDP.

%

Dtr

10 20 30 M

Fig. 22. The demand for money for transactions

Households need a certain amount of money for the purchase of essential goods, and businesses - to pay wages and electricity costs, materials, etc.

B. The demand for money from the assets - a consequence of the functionality of the savings. The level of demand depends on the price (interest rate level) in cash assets.

%

Dа

M

Fig. 23. The demand for money from the assets.

Companies and individuals can keep their assets in various forms - stocks, bonds, money. Each of them has its pros and cons.

Money - the liquid, but do not give a percentage of income. Shares carry a dividend, but not have the ability to access funds.

The answer to the question: how many financial assets to keep the money, and how much in bonds? - Is the value of the interest rate (the relationship is inverse).

The total demand for money is: Dо = Dtr + Dа

% D2 D0 D1

10

М

Fig. 24. The total demand for money

If growing GNP, all other things being equal, demand schedule for money (D1) will move to the right, if GNP will decline, the D2 moves to the left.

What determines the supply of money?

The main sources are:

1. Central (national) bank directly controls a large part of the money supply. Because of certain political decisions, he controls the issuance of money.

2. Commercial banks. Providing loans to businesses and households for purchases, accelerating the movement of commodities, money, which, in turn, re-fit on the new bank account? Addition of money commercial banks provides the ability to issue more loans.

3. National Bank may affect the money supply through the purchase - sale of securities.

4. Currency movement abroad and because of her. The higher the interest rate in the country compared to the surrounding countries, the greater the flow of money from abroad. Likewise, the low interest rate leads to a reduction in leakage rates and the money supply.

Of what elements is the proposal?

Are the following:

M1 - cash

M1 - cash in circulation plus deposits of funds to non-urgent.

Urgent checking accounts can be transferred to the investor call non-urgent and used as non-cash.

Most appropriate at the present time is "near money" - M2:

M2 = M1 + demon checking savings accounts + small (no more than 100 thousands U.S.) term deposits.

М3 = М2 + крупные ср. вклады

The third official definition M3 assumes the company owned by large (up to 100 thousands U.S or more) in the form of bank deposits of certificates that can easily apply to the checking deposits.

M3 = M2 + large time deposits

In the presence of demand and supply forms the money market.

Money market - a market where the quality of the product are the money as cash and non-cash.

Consider the money market and to determine the equilibrium interest rate - (%).

excess

Е

%

4

3

2

Dм

Sm1 Sm Sm2

deficit

10 15 20

М

Fig. 26. Restoring the balance in the money market

Price is the equilibrium interest rate (%) at E.

        Sm - the money supply as the total amount of M1.

        1) Assume that the amount of money supply decreased from 15 to 10 billion dollars more than the number required by the proposed $ 5 billion under the previous% = 3.

To adapt to the lack of money, people will sell part of the financial assets at a higher price (example - 4%), which will lead to the equality of supply and demand.

Conclusion: The decrease in the price of the bond will increase the interest rate.

2) Assume the market increases the money supply from 15 to 20 billion dollars in the same% = 3.

People are encouraged to get rid of money, buying bonds, increasing the demand for them, thus increasing and price.

Conclusion: The increase in bond prices will lower the interest rate.

So, considering the money market, we see that the demand and supply of money are in constant motion, the balancing is provided only to a certain structure of the financial system.