Measuring the Money Supply M1: Currency in Circulation +Demand (Checking Accounts on which checks may be drawn) Deposits+Travelers Checks (The most widely used and most liquid definition yet the narrowest.) Currency in Circulation (Paper and Coins): Vault Cash in Banks and Currency outside of Banks. M2: M1+ Savings (Time) Deposits+Money Market Mutual Funds (investments on liquid T-Bills and CDs) +Certificates of Deposits (CDs-large denomination saving accounts with competitive yields)+Eurodollars (US$ deposited in European Banks.) M3: M2+ large denomination savings accounts+institutional money market mutual funds. Three Major Functions of Money Unit of Account.2. Medium of Exchange 3. Store of Value.Banking is the art of lending and getting it back. AnonymousHow banks operate in a Fractional Reserve System If banks, regulated by the CB (Central Bank), were imposed reserve requirements of 100%, they would hold all of their deposits as reserves and would loan nothing out. Deposit money would collect dust in bank vaults. In fractional banking system, banks are imposed reserve requirements as a fraction of their total deposits by the CB to be able to meet deposit withdrawals at any point in time.For instance, a bank with $100 Million worth of deposits should keep $10 Million as required reserves either in the form of vault cash or bank reserve account in the CB or both to meet a 10% reserve requirement ratio. The remaining amount of $90 Million can be invested by the bank in government bonds and loans. Sometimes, prudent banks, those concerned with loan defaults (likely to increase during recession and bad economic times), hold excess reserves over and beyond the required reserves, contracting their loan portfolio especially when staying liquid is desirable. Or Alternatively, those banks may channel a large portion of their deposits to liquid and safe assets like government bonds and T-Bills instead of loaning them to private firms. T...
