3

Chapter 12 money and its creation

1. Key terms – matching and translation.

Read aloud the key term and its definition so that they make up a single sentence. (Remember about the agreement between the subject and the predicate!). Translate the sentences you have arrived at from English into Russian.

Set 1

credit	Created in 1913 to mitigate the impact of financial crises.
money multiplier	Extension of money; uses money as a standard of deferred payment.
MI	Always equals one in a 100 percent reserve banking system
currency	Broader definitions of the money supply.
Federal Reserve System	Currency plus "checkable" deposits.
barter	Purchasing power of money.
seignorage	Requires double coincidence of wants.
value of money	Coins and paper money.
M2, M3 and L	Profits made by government when it prints or coins money.
liquidity	Inversely related to the transactions costs incurred when an asset is bought or sold.

Set 2

measure of value	Money as an asset.
potential money multiplier	Goods trade for money, and money trades for goods.
store of value	Money that is valuable in itself.
reserves	Money as a standard of credit.
fiat money	ma = MS/MB.
Gresham's Law	Standard unit of account.
medium of exchange	“Bad money drives out good”
actual money multiplier	Money valued only for what it buys.
standard of deferred payment	1/(reserve requirement ratio).
commodity money	Cash in bank vaults.

2 Text translation.

Translate the text from English into Russian in writing paying particular attention to the translation of the economic terms in bold as well as words and phrases relevant to the subject of the text. Read out your translation in class and introduce the necessary corrections.

Money and its creation

Chapter Objectives

After you have read and studied this chapter you should be able to describe the functions money performs in a market system; differentiate between alternative forms of money and definitions of the money supply; differentiate between potential money multipliers, actual money multipliers, and the monetary base; and explain how the interactions between banks and their customers determine the amount of money in circulation.

Chapter Review: Key Points

1. Barter requires a double coincidence of wants – trade can only occur if each party has what the other wants and if divisibility poses no problems.

2. Money ensures this double coincidence of wants — the seller will accept money because of what it will buy, while the buyer is willing to exchange money (and thus, all else it will buy) for the good or service in question.

3. Money facilitates specialization and exchange by decreasing transaction costs. The more sophisticated the financial system, the greater the level of production and consumption and the higher the standard of living.

4. Money is a medium of exchange. It is used for most transactions in monetary economies.

5. Money is a measure of value. Used as a standard unit of account, it is the common denominator for pricing goods and services.

6. Money is a store of value. It is among the most nominally secure of all assets people can use to hold their wealth.

7. Money is a standard of deferred payment. Serving as a link between the past, present, and future, it is used as a measure of credit to execute contracts calling for future payments.

8. Liquidity is negatively related to the transaction costs incurred in exchanges of assets. Time, certainty regarding price, and the quality of information in a market are all dimensions of liquidity. Assets are liquid if transaction costs are low, illiquid if transaction costs are high.

9. Commodity monies (precious metals, stones, or arrowheads) have values that are independent of what they will buy. Fiat money (paper currency) is valuable only because it is money; its use is based on faith.

10. The profit governments make from printing money or stamping coins is called seignorage.

11. According to Gresham's Law, "Bad money drives out good".

12. The very narrowly defined money supply (MI) is the total of: (a) currency (coins and bills) in the hands of the nonbanking public, plus (b) demand deposits (checking accounts of private individuals, firms, and nonfederal government units in financial institutions).

13. Some highly liquid assets are viewed as near-monies and are included in broader definitions of the money supply (M2 and MЗ) by monetary analysts who believe the spending of the public can be predicted better if these assets are included. Examples of such highly liquid assets include short-term time deposits (savings accounts) and certificates of deposit (CDs). The assets included in “money supplies” defined more broadly than M1 are judgmental because these assets are not mediums of exchange.

14. Banks “create” money through loan-based expansions of demand deposits (checking account money). They make loans based on currency they hold as reserves, and these loans take the form of new demand deposit money.

15. Banks hold reserves that are far less than their deposit liabilities. The larger the proportion of deposits held as either excess or required reserves, the smaller are the money multiplier and resulting money supply, given some fixed total amount of reserves.

16. The potential money multiplier (m_p) equals 1/rr, where rr is the banking system’s planned or legally required reserves as a percentage of deposits. The actual money multiplier is much smaller because: (a) households and firms hold currency that could be used as a base for the money creation process were this currency held in bank vaults as reserves against deposits; and (b) banks hold excess reserves to meet withdrawals of deposits.

17. The actual money multiplier (m_a) equals MS/MB, where MS is the money supply and MB is the monetary base, or high-powered money. Naturally, MS = m_aMB.

18. Financial institutions facilitate flows and payments of funds and provide secure places for savers’ deposits. Their most important economic function is to channel funds from savers to financial investors and other borrowers through a process called financial intermediation. Commercial banks, savings and loan associations, mutual savings banks, credit unions, insurance companies, and stock exchanges are all financial intermediaries.

3 Vocabulary practice: switching.

Get ready for an oral (written) translation exercise based on the economic terms in bold, as well as other relevant words and phrases from the text.

Commodity money; металлические деньги и банкноты; savings & loan association; контракты, предусматривающие будущие платежи; savings account; получаемая властями прибыль от выпуска денег; sophisticated financial system; краткосрочный вклад; value of money; чеканить монеты; standard of deferred payment; уровень жизни; meet withdrawals of deposits; стандартная расчётная денежная единица; stock exchange; союз кредитной взаимопомощи; demand deposit money; denominator; активы; банковское хранилище; certificate of deposit (CD); понесённые издержки; уверенность относительно цены; channel money; предоставление денег; “checkable” deposits; checking account; облегчать движение средств; Federal Reserve System; неразменные бумажные деньги; финансовое посредничество; given; депозитные обязательства; dimensions of liquidity; делимость; двойное совпадение потребностей; incur costs; влечь за собой высокие операционные издержки; избыточные резервы; execute contracts; количество денег в обращении; arrowhead; деньги повышенной надежности; interactions between banks and their customers; денежная экономика; mitigate; эксперт по деньгам (аналитик); money supply (M1); экономика, в которой не функционируют деньги; mutual savings bank; субститут денег (квазиденьги); все лица и организации кроме самих банков; paper currency; потенцальный денежный мультипликатор; percentage of deposits; назначать цену товарам и услугам; judgemental assets; обязательные по закону резервы; loan-based expansion of demand deposit; уровень потребления; make profit; мера стоимости; private individuals; средство обращения; печатать (бумажные) деньги; покупательная способность\сила денег; required reserves; норма обязательных резервов; reserves against deposits; средство сбережения; saver’s deposits.