PLAN: Introduction. 1. Money Origin of money. 1.2.Functions of money. 2. Banks. The emergence of banks. Bank operations. 3. Calculation part. Conclusion. List of used literature.

INTRODUCTION Nowadays, money has become the meaning of life for many. A lot of people spend all their time making money, sacrificing their family, relatives, and personal lives. "Money casts a spell on people. They suffer because of it, they work for it. They come up with the most ingenious ways to spend it. Money is the only commodity that cannot be used except to free yourself from it. It will not feed you, it will not clothe you, it will not will give shelter and not entertain until you spend or invest it. People will do almost anything for money, and money will do almost everything for people. Money is a captivating, repeating, mask-changing riddle" (Honoré de Balzac).

Having surplus cash, people invest it in real estate, developing their business, etc. But in a market economy, this can be risky and does not always lead to increased income. Money, like any product, can be bought and sold on the market. And just as business cannot exist without the exchange of money and goods, so the circulation of money is unthinkable without the participation of intermediaries - banks. Due to the fact that currently the activities of banking institutions are very diverse, their true essence is uncertain. Today, banks are engaged in various types of transactions. In addition to organizing money circulation and credit relations, insurance operations, purchase and sale of securities, intermediary transactions and property management, and financing of the national economy are carried out through them.

Every person is already or can be a potential bank client. That is why the topic of this study is relevant in our time. Objectives of the research work: 1) determining the place and role of money and banks in modern society; 2) show with specific examples the essence of banking operations, as well as their profitability both for the bank client and for the bank itself.

1. MONEY Origin of money. Many thousands of years ago, people came up with something that after a short time began to be valued more than anything else. Something that produced a real revolution in the sphere of movement of material goods, and pushed economic life itself several stages forward. The historical periods of development of monetary circulation are quite consistent with the types of monetary units, so it would be most advisable to consider the following milestones in the development of money: 1) Quasi-money - this includes all means of exchange that do not fit into a person’s modern idea of ​​money. 2) Metal money. They refer to money made from various metals, be it gold, silver or copper. 3) Paper money. 4) Electronic signs of modern network payment systems. The main criterion in this classification is not the source material with which funds are made, but rather the method of their circulation, circulation in commodity circulation.

The first money invented by mankind least of all resembled a banknote, and few people would dare call it money in the traditional sense of the word. Nevertheless, they could perform the main monetary function - the function of a universal commodity equivalent, therefore, accordingly, they were money. As a matter of fact, initially the role of money was played by goods exchanged for each other in certain quantitative and qualitative ratios. For example, products were exchanged for valuable goods with a long shelf life: furs, grain, rare stones, sea and river shells, and so on. Cattle became a commodity by which all other goods were valued, and which was willingly accepted everywhere in exchange for them. In a word, cattle acquired the function of money and served as money already at this stage. With such necessity and speed, the need for a special commodity, money, developed even at the very emergence of commodity exchange. With the division of social production into two large main sectors - agriculture and crafts - commodity production arises, and with it trade. From now on, noble metals (they are not susceptible to chemical action, and are also relatively rare in nature) begin to become the predominant and universal commodity in money, but at this time they are not yet minted, but are only exchanged simply by weight.

Coins began to be produced at the beginning of the 6th century BC in the territory of Lydia. There are several known forms of production (issue) of metallic money: Monometallism. Occurs when coins are made of one metal. For example, from copper (Ancient Rome), gold (Western European countries) or silver (Russia). Bimetallism. With it, a mixture of metals (not necessarily precious) took place. This form is inherent in all countries at a late stage of development of capitalist relations. Base metals, such as copper, very often served initially as money, and then were replaced by noble metals. Copper, and after the introduction of gold currency, silver, ceased to be measures of value, although copper and silver coins continue to function as a means of circulation in petty trade. They now correspond to certain weight parts of gold. The value they represent varied with the real value of gold and was in no way affected by the fluctuations in the value of silver and copper.

The first paper money originated in medieval China. The first mention of paper money dates back to the 11th century. Paper money can replace gold money only as a medium of exchange, but not as a measure of value. They can replace them only insofar as they represent certain quantities of gold. Paper money can never be more expensive than metal money and represent a greater quantity of gold than can be absorbed in the circulation of goods.

1.2. FUNCTIONS OF MONEY. Economists identify five main functions of money. 1. Measure of value: money measures the value of goods through prices, thereby comparing goods with qualitatively different consumer properties. In other words, money serves as a kind of “ruler” for measuring prices. This function is so important that money is most often defined as a universal equivalent. Acting as a measure of value, money is necessary as mentally represented money. For example, to state that a kilogram of pears is twice as expensive as a kilogram of apples, the presence of prices is sufficient; money itself in any material form is not needed at all for this comparison.

2. Medium of exchange: money plays the role of intermediaries in the exchange of goods. Instead of directly exchanging one product for another, which is called barter, commodity producers receive money for the goods they sell, with which they purchase other goods they need. This function is described by the formula commodity-money-commodity. When money plays the role of an intermediary, the acts of buying and selling do not coincide in time and space. A commodity producer gets the opportunity, for example, to sell one product today and buy another only in a day, week, month, etc. Further, he can sell his goods in one place and buy what he needs in a completely different place. Thus, money as a medium of exchange overcomes the temporal and spatial limitations of exchange relations.

3. Store of wealth: with the help of money, a certain reserve of wealth is created. We are talking about the ordinary accumulation of funds before purchasing any expensive goods (or accumulation for other purposes). For example, to buy a car, you need to save money for a number of years until the required amount is accumulated. There is a break in the chain: instead of commodity-money-commodity, first commodity-money occurs, and only then, after a significant period of time, money-commodity. Money is temporarily removed from circulation and is “in the hands” of commodity producers; the sale of one product is not accompanied by the immediate purchase of another. To effectively perform this function (as well as for the function of a measure of value), it is very important that money retains its value, that is, does not depreciate. 4. Means of payment: the movement of money is “detached” from the movement of goods and lags behind in comparison. This happens when credit develops. Thus, a buyer can buy a car in installments, as a result of which he immediately becomes its owner, but continues to make payments for it in installments over a long period of time. 5. World money: manifests itself in the free circulation of certain types of money outside its national borders. Nowadays, this role is performed by the most reliable national currencies. These are, first of all, the dollar and the euro.

2. BANKS. The emergence of banks. Bank operations. Already in ancient times, usury was widespread - issuing money at interest. The difference between the amount that was returned to the usurer and the amount that was originally taken from him was called the surplus. So, in Ancient Babylon it was already 20% or more! This meant that an artisan who took 1000 monetary units from a moneylender for a period of one year returned to him after a year no less than 1200 of the same units. It is known that in the XIV – XV centuries. Banks became widespread in Western Europe.

Banks at that time were institutions that lent money to princes, merchants, artisans, financed long journeys, campaigns of conquest, etc. Of course, banks did not give money disinterestedly: they charged a fee for using the money provided, just like moneylenders in ancient times. This payment was usually expressed as interest on the amount of money lent.

Those who borrow money from a bank are called borrowers, and the loan, i.e. The amount of money taken from a bank is called a loan. The bulk of the money that banks give to borrowers is the money of depositors, which they deposit in the bank for safekeeping. Part of the profit that the bank receives is transferred to depositors in the form of fees for the use of their money. This fee is also usually expressed as a percentage of the deposit amount. Thus, funds deposited in a bank, after a certain period of time, generate some income equal to the amount of interest accrued during this period.

So, on the one hand, banks accept deposits and pay interest on these deposits to depositors, and on the other, they give loans to borrowers and receive interest from them for using this money. The difference between the amount the bank receives from borrowers for loans provided and the amount it pays on deposits is the bank's profit. Thus, the bank is a financial intermediary between depositors and borrowers.

One of the most common ways to attract savings from citizens, firms, etc. to the bank. is the opening of a savings account by a depositor: the depositor can deposit additional amounts of money into his account, can withdraw a certain amount from the account, or can close the account, completely withdrawing the money stored on it. In this case, the depositor receives payment from the bank in the form of interest for using the money to issue loans to entrepreneurs, firms, the state, other banks, etc.

3. CALCULATION PART. Let's consider the bank's settlement schemes with depositors. Depending on the method of calculation, interest is divided into simple and compound. Simple interest: an increase in the deposit So according to the simple interest scheme is characterized by the fact that the amount of interest during the entire storage period is determined based only on the initial amount of the deposit So, regardless of the storage period and the amount of interest accrued.

Let a depositor open a savings account and deposit S o rubles into it. Let the bank undertake to pay the depositor at the end of each year p% of the initial amount S o. Then, after one year, the amount of accrued interest is S o r / 100 rubles and the amount of the deposit will become equal to S = S o (1 + r / 100); here p% is called the annual interest rate. If after one year the depositor withdraws the accrued interest S o r / 100 from the account, but leaves the amount So, the bank will again accrue So r / 100 rubles, and in two years 2 S o r / 100 rubles. After n years, the deposit according to the simple interest formula will be: S n= S o (1 + (pn):100) (2)

Let's consider another way of settling a bank with a depositor. It is as follows: if the depositor does not withdraw the amount of accrued interest from the account, then this amount is added to the main deposit, and at the end of the next year the bank will charge p% on the new, increased amount. This means that the bank will now begin to charge interest not only on the main deposit, S o, but also on the interest that relies on it. This method of calculating “interest on interest” is called compound interest. S n= S o (1 + p:100), (2) where n – deposit term = 1, 2, 3, …

Example 1. The bank pays depositors every year 8% of the deposited amount. The client made a deposit in the amount of rubles. What amount will be in his account after 5 years, after 10 years? To solve this problem, we use formula (1): 1) S= (1+85:100)= ,4= (rub.) – in 5 years; 2) S= (1+810:100)= ,8= (rub.) – in 10 years.

Example 2. A depositor opened a bank account, deposited 2,000 rubles into a deposit with an annual income of 12%, and decided not to take interest charges for 6 years. What amount will be in his account after 6 years? Because the depositor does not charge interest, then the deposit amount with interest will be calculated according to formula (2), i.e.: S=2000(1+12/100), where n=6; S=20001, ~3947.65 (rub.)

Example 3. At what interest rate will a deposit worth 500 rubles increase in 6 months to 650 rubles? Let the interest rate be x%. Then we will express it from the formula for calculating simple interest (1), substituting already known data: 500(1+6x:100)=650; 5(100+6x)=650; X=650; X=5 (%).

Example 4. The bank provided a loan to the client in rubles. at 20% per annum for 3 months. How much amount will the client have to return to the bank after the specified period? Let's determine the monthly interest: P month =20/12=1, And since the client took out a loan for 3 months, then: P=1, =5. Let's find the refund amount using formula (1): S=100000(1+5:100)= (rub.)

Example 5. Based on the data from the previous problem, determine the real interest rate of the bank if it serves 3 more clients one after another on the same terms, while issuing a loan in the amount of the repaid amount with interest. 1) S 1 (example 4) = rubles. 2) S 2 = .05 = (rubles) 3) S 3 = .05 = 115762.5 (rubles) 4) S 4 = 115762.51.05 = 121550.63 (rubles) The total amount of interest received is: p = .63=52563.13 Thus, the real interest rate is not 20%, but: P real =52563.13: ~ 52.56%.

Example 6. The bank issued a loan to the client on the following terms: initial amount - rubles, interest rate - 170% per annum, loan term - 2 years. Determine how many times the amount of debt by the end of the loan term will exceed the original amount of debt. Using formula (1) we determine the refund amount: S=200000(1+2170:100)= (rubles). The amount of debt by the end of the loan term will exceed the initial amount of debt by: 200000 = 4.4 (times)

Example 7. The bank issued a loan in the amount of rubles for 3 years at 50% interest per annum on simple interest terms with the requirement of equal monthly repayment of the debt during this period. How much should the client repay each month? Using formula (1), we find the amount of debt with interest for 3 years: S=24000(1+350:100)=60000 Therefore, every month the client will have to repay: 60000:3:12=1666.67 (rubles)

Example 8. The client deposited rubles in the bank. During the first year and a half, the interest rate on the deposit was 20% per annum, then the rate was raised to 40% - this rate remained for six months, after which it rose to 50%. How much amount will the bank have to return to the client after four years? S 1 =20000(1+1,520:100)=26000 (rubles); S 2 =26000(1+0.540:100)=31200 (rubles); S 3 =31200(1+250:100)=62400 (rubles).

TO IDENTIFY THE ESSENCE OF LOAN, LET'S CONSIDER THE FOLLOWING EXAMPLE. Example 9. A credit institution provided an individual with a targeted loan in the amount of rubles for a period of 3 years at 25% per annum. It is necessary to calculate the client's monthly payments to the bank.

Solution. Loan term = 3 years = 36 months. Let's calculate the monthly repayment of the principal amount: rub. : 36 months = 2,777.78 rub. Those. the client must pay 2,777.78 rubles monthly. But this is an incomplete amount, because... interest on the loan is not taken into account here. Let's calculate their amount for 1 month: .25: 12 = 2083.33 (rub.). Thus, in the first month the client must pay the bank: 2777.33 = 4861.11 (rub.)

To calculate payments for the 2nd month, it is necessary to subtract the monthly principal payment amount from the amount of the received loan, and then accrue interest on the amount received, i.e.: – 2777.78 = 97222.22 (rub.) 97222.22 0.25 : 12 = 2025.46 (rub.) Thus, the total amount of payments in month 2 will be: 2777.46 = 4803.24 (rub.)

To calculate payments for using a loan in the 3rd month, it is necessary to subtract the amount of the monthly installment from the amount of the principal debt received when calculating the installment in the 2nd month, and then accrue interest: 97222.22 - 2777.78 = 94444.44 (rub.) 94444, 44 0.25:12 = 1967.59 (rub.) Thus, the amount of payments by the client in the 3rd month: 2777.59 = 4745.37 (rub.) Payments for the remaining months are calculated in a similar way. We will draw up a payment schedule for the client.

Month Payment Interest Amount Balance 12777,782083,334861,782025,464803,781967,594745,781909,724687,781851,854629,781793,984571,781736,114513,7816 78.244456,781620,374398,781562,494340,781504,624282,781446,754224 ,781388,884166,781331,014108,781273,144050,781215,273993,58

Thus, the client pays the bank an amount of 38,541.5 rubles for using the loan. The total amount paid is: .5 = .5 (rub.)

CONCLUSION. The existence of humanity without money in a market economy is impossible, since they play a very important role, manifested in their main functions: means of circulation, means of payment, means of accumulation. The circulation of money is unthinkable without the participation of intermediaries - banks. They are at the center of economic life, serving the interests of producers, connecting industry and trade, agriculture and the population with cash flow. All over the world, banks have significant power and influence; they control enormous monetary capital flowing to them from enterprises and firms, from traders and farmers, from the state and individuals.

Banks have become a part of our lives. Although in Russia the role of banks was so often ignored, their economic purpose was reduced to such an extent that even now, when our country began to live according to different economic laws, many people do not pay the attention to the activities of banks that it deserves. The question of what a bank is is not as simple as it seems at first glance. In everyday life, banks are depositories of money. At the same time, this and similar everyday interpretations of the bank not only do not reveal its essence, but also hide its true purpose in the national economy. Based on the examples given in the research work, we can conclude that for bank clients, storing money in a bank is not only reliable, but also profitable.

The banks themselves, being a mechanism for generating profit for their clients, also make a profit when performing operations to place funds attracted into deposits. Consequently, the cooperation of banks with their depositors is mutually beneficial, as shown when solving problems in this research work.

LIST OF REFERENCES USED 1.Money. Credit. Banks. Ed. Prof. E.F. Zhukova. - M.: UNITY, Money, credit, banks: Textbook / ed. O.I. Lavrushin. M.: Finance and Statistics, 2007; 3. Zaichenko N.A. Primer for Rockefellers. Tutorial. – St. Petersburg: SMIO Press, Studenetskaya V.N., Sagatelova L.S. Mathematics: collection of elective courses. – Volgograd: Teacher, 2007.

Money and the banking system Lecture 6 Money and the banking system Money and its functions Types of money Monetary aggregates Banking system Money creation by commercial banks Deposit and credit multipliers Money multiplier Demand for money Money market equilibrium $$ ¥ ¢ ££ RUR

Money and its functions Money is something that is usually accepted as a means of payment for goods and services or used to pay debts. functions Money performs the following 4 functions: a medium of circulation (exchange) a medium of circulation (exchange), which allows you to buy goods and services, and this is the main function of money; unit of account unit of account, i.e. value meter, which provides a single meter for prices, costs, revenue and income; stock of value is a stock of value that allows you to postpone spending current income and thus save it to make purchases in the future; measure of deferred payments measure of deferred payments, i.e. an intertemporal unit of account that can be used to pay off debts and therefore allows for the giving and taking of loans. ¥$$

Types of money Commodity money Commodity money is ordinary goods that serve as a means of circulation. Therefore, they have intrinsic (true) value; their value as money and as goods is the same. Token money legal tender by law fiat money Token money is a means of payment whose value as money exceeds the cost of its production or value in its use other than as money. They must be legal tender and are accepted as legal tender. Cash, whether made from paper or from cheap metals, is used as money only because it is considered money by order of the government, i.e. are maternity money. Credit money (IOUmoney) debt Credit money (IOU - I owe you - money) (“I owe you” money) is a means of payment based on the debt of a private agent (firm or individual). Plastic cards are not considered money in macroeconomics because they represent a short-term loan from a bank to its owner and are already included in the money supply as funds deposited in the commercial banks that issued these cards.

Monetary aggregates in the USA are: M1 M1 = cash outside the banking system (coins and paper money) + checking (or current) accounts + travelers checks. M2 M2 = M1 + savings accounts + small time accounts (less than $100,000) + money market mutual funds + Eurodollar accounts. M3 M3 = M2 + large fixed-term accounts + fixed-term accounts in Eurodollars. L L = M3 + Treasury bills (short-term government bonds) + other less liquid assets. M1 M2 M3 L Liquidity Liquidity is the ability of an asset to quickly turn into money with minimal loss of face value or into any other asset. The most liquid asset is cash. LIQUIDITY YIELD

Monetary aggregates in Russia M0 = M0 = cash in circulation (outside banks) M2 (money supply) = M2 (money supply) = M0 + non-cash funds (balances in national currency in the accounts of non-financial organizations and individuals who are residents of the Russian Federation ) Monetary base Monetary base (in a broad definition) = cash in circulation + correspondent accounts and deposits of credit institutions with the Bank of Russia + required reserves (including in foreign currency) + Bank of Russia bonds with credit institutions

Banking system credit system The banking system is part of the credit system. In addition to banks, the credit system also includes other (non-banking) financial institutions that can attract money and issue loans. These include: pension funds; investment funds; Insurance companies; credit unions; savings and loan associations; pawnshops, etc. The modern banking system has two levels. Central Bank Commercial banks

The Central Bank and its functions Federal Reserve System Bank of England Bank of Russia Conducting monetary policy (the most important function) Controlling and regulating the activities of commercial banks and other financial institutions Providing loans to commercial banks and other financial institutions (lender of last resort) Providing banking services to the government (government banker ) Issue of paper money and coins (issue of money) Providing financial services to commercial banks and other financial institutions

Balance Sheet of the Central Bank Assets Liabilities Loans to commercial banks Banknotes (cash) Loans to the government Deposits of commercial banks Government bonds Government deposits Government short-term securities Gold and foreign exchange The two sides of the balance sheet of any bank must always be equal: Assets = Liabilities balance sheet identity This is the basic balance sheet identity , which means that if one side changes, the other side must also change.

Liabilities (liabilities) Deposits (demand, savings, time deposits); Reserves that can be borrowed from the Central Bank; Bank's own capital Balance sheet of a commercial bank accumulating the population's money issuing loans The main operations of commercial banks are accumulating the population's money (passive operations) and issuing loans (active operations). Assets Liabilities Reserves Loans Loans Deposits Simplified commercial bank balance sheet Assets Cash; Required reserves; Excess reserves that can be loaned out; Loans; Shares and bonds of private companies; Government securities

Types of banking systems Full (100%) reserve system Assets Liabilities Reserves = 1000 Loans = 0 Deposits =1000 Reservation rate (rr) The entire volume of deposits is stored as reserves and is not issued on credit. Fractional reserve system Assets Liabilities Reserves = 100 Loans = 900 Deposits = 1000 Only part of the deposits is kept as reserves and the rest is loaned out. Reservation rate (rr)

Commercial Bank Reserves The ability of the banking system to create transaction (or check, or demand, or current) deposits is controlled by the central bank through the establishment of required reserve ratios for these accounts. Reserve Required Ratio The required reserve ratio (rr oblig) is the percentage of deposits that each commercial bank must hold as reserves and is not allowed to lend out. Required reserves (R oblig) = = Deposits × Required reserve ratio = = Deposits × Required reserve ratio = = D × rr oblig = D × rr oblig

Reserves of commercial banks The difference between the amount of deposits and required reserves is called excess reserves or lending potential, because these funds can be issued on credit: Excess reserves (R excess) = Excess reserves (R excess) = = Deposits - Required reserves = = Deposits - Required reserves = = D - D × rr liability = D × (1- rr liability) = D - D × rr liability = D × (1- rr liability) If part of the excess reserves is kept in the bank and is not issued on credit, then the actual reserves of the commercial bank will be: Actual reserves (R fact) = = Required reserves + Excess reserves = = Required reserves + Excess reserves = = R oblig + R ex = = R ob + R ex = = Deposits – Loans = D - K = Deposits – Loans = D - K

How banks create money Deposits = 1000 Reserves = 100 Loans = 900 Liabilities Assets Bank 1 Bank 2 Deposits = 900 Reserves = 90 Loans = 810 Liabilities Assets Bank 3 Deposits = 810 Reserves = 81 Loans = 729 Liabilities Assets Reservation rate = 10%

Deposit multiplier A necessary condition for commercial banks to create money is the existence of a fractional reserve system. Conditions for maximum increase in money supply: M = D = D I + D P + D Ш + D IV + … = = D 1 + D 1 × (1 – rr) + × (1 – rr) + = D 1 + D 1 × (1 – rr) + × (1 – rr) + + × (1 –rr) + × (1 – rr) + … = + × (1 –rr) + × (1 – rr) + … = = D 1 × (1/rr) = D 1 × (1/rr) Deposit multiplier = The deposit multiplier shows the volume of supply created by 1 monetary unit of deposits. In our case: M = …= D 1 × (1/0.1) = 1000 × 10 = M = …= D 1 × (1/0.1) = 1000 × 10 = banks do not hold excess reserves, the population does not hold cash on hand

Deposit expansion process Bank I D 1 = 1000 K 1 R 1 K 1 = D 1 × (1 – rr) K 1 R 1 K 1 = D 1 × (1 – rr) Bank II D 2 = K 2 R 2 K 2 = × (1 – rr) K 2 R 2 K 2 = × (1 – rr) Bank Ш D 3 = K 3 R 3 K 3 = × (1 – rr) K 3 R 3 K 3 = × (1 – rr) Bank IV D 4 = K 4 R 4 K 4 = × (1 – rr) K 4 R 4 K 4 = × (1 – rr) Bank V D 5 = K 5 R 5 K 5 = × (1 – rr) K 5 R 5 K 5 = × (1 – rr)

Credit multiplier M = D P + D Ш + D IV + D V + … M = D P + D Ш + D IV + D V + … = D 1 × (1 – rr) + × (1 – rr) + = D 1 × (1 – rr) + × (1 – rr) + + × (1 –rr) + × + × (1 –rr) + × × (1 – rr) + × (1 – rr) + … = × ( 1 – rr) + × (1 – rr) + … = ΔM = K = K 1 + K 2 + K 3 + K = i.e. ΔM = K = K 1 + K 2 + K 3 + K = = K 1 + K 1 × (1 – rr) + K 1 × (1 – rr) 2 + K 1 × (1 – rr) = K 1 + K 1 × (1 – rr) + K 1 × (1 – rr) 2 + K 1 × (1 – rr) = K 1 × (1/rr) = K 1 × (1/rr) In our example M = … = M = … = = 900 × 1/0.1 = 900 × 10 = 9000 = 900 × 1/0.1 = 900 × 10 = 9000

Credit multiplier The credit multiplier is equal to the deposit multiplier minus 1. Credit multiplier The credit multiplier shows the change in the supply of money as a result of a change in loans by 1 monetary unit. M = D × (1/rr – 1) = 1000 × 9 = 9000 In our example, M = D × (1/rr – 1) = 1000 × 9 = 9000 Thus, the change in money supply can be calculated either by applying the deposit multiplier to loans M = K 1 × (1/rr) M = K 1 × (1/rr) or by applying the credit multiplier to deposits M = D 1 × [(1/rr) – 1] M = D 1 × [(1/ rr) – 1]

There are two circumstances that may limit the process of deposit expansion. desire of commercial banks to hold excess reserves desire of commercial banks to store excess reserves desire of the population to keep more money on hand in the form of cash, desire of the population to keep more money on hand in the form of cash rather than in a bank account in the form of deposit Limitations of the process of deposit expansion Changes in the supply of money in these cases it will be less, and the money supply (rather than the deposit) multiplier will determine the money supply.

Determinants of money supply In macroeconomics, money supply (M) refers to the monetary aggregate M 1, which consists of cash outside the banking system (CU) plus demand deposits (or current accounts) (D): M = CU + D behavior Money supply (monetary mass) depends on the behavior of: the Central Bank, which sets the norm of required reserves (rr), commercial banks, which store a certain amount of reserves (R = R oblig + R surplus), the population, which stores a certain amount of cash (CU).

Base Monetary The central bank can influence the money supply only through changes in the monetary base (B), also called high-power money or central bank money. The monetary base includes cash outside the banking system (CU) and commercial bank reserves (R): B = CU + R The ratio of the money supply to the monetary base is called the money multiplier: Money multiplier = M/B

Money multiplier The value of the money multiplier depends on: the proportion in which the population divides money between deposits and cash - the deposit rate (cr = CU/D) on the reserve rate of commercial banks (rr = R/D): Money Money multiplier = Money multiplier shows the change supply of money resulting from a change in the monetary base by one monetary unit. The value of the money multiplier increases if: The Central Bank reduces the required reserve ratio The desire of banks to store excess reserves decreases People prefer to store less money in the form of cash, increasing deposits in banks

The supply of money is controlled by the central bank (CB), it does not depend on the interest rate and is graphically represented by a vertical line. The reasons for shifts in the money supply curve are changes in the money supply by the Central Bank. If the central bank increases the money supply, the money supply curve shifts to the right. If the central bank decreases the money supply, the money supply curve shifts to the left. Money supply curve and its shifts i MSMS M M i MS1MS1 M 1 M MS2MS2 M 2 i MS2MS2 M2M2 M MS1MS1 M1M1 25

Types of Financial Assets Number of Trades Interest Rates The ratio of money to bonds that a person wants to have in his financial portfolio depends on the number of trades he wants to make and the interest rate that is paid on the bonds. In practice, there are various financial assets. To simplify the analysis, macroeconomics considers two main types of financial assets: money and bonds. Money cashdemand deposits Money can be used to make transactions, but does not generate income. There are two types of monetary financial assets: cash and demand deposits. Bonds Bonds generate interest income i, but cannot be used in transactions. 26

Demand for money The motives for the demand for money are based on two main functions of money: a medium of exchange and a store of value. motive There are three motives for storing money: transactional motive transactional motive - money is necessary for making transactions, i.e. purchases of goods and services; precautionary motive (prudent) precautionary motive (prudent) - money is needed for unplanned (unforeseen) purchases, i.e. due to uncertainty; speculative motive speculative motive - money is a financial asset, but there are other types of financial assets (stocks and bonds) that serve as better stores of value because they not only store value, but increase it over time (earn interest income). 27

Determinants of demand for money Price level (P) At higher prices, people need more money to buy more expensive goods and services Nominal interest rate (i) At a higher interest rate, i.e. higher opportunity costs of holding money (instead of, for example, income-generating bonds), the demand will be for less money. Level of real GDP (Y) Higher output means more goods and services produced in the economy More money is required by buyers to make more transactions Transactional motive Speculative motive

Movement along For example, an increase in the interest rate from i 1 to i 2 (i.e., an increase in the opportunity costs of holding money) reduces the demand for money in the economy (from M 1 to M 2) and corresponds to a movement along the curve M D (from point A to point B). Money demand curve negative slope of interest rate The demand curve for money has a negative slope, which reflects the inverse effect of a change in the interest rate on the quantity of money demanded. of real output the price level shifts If there is an increase in real output (Y) or an increase in the price level (P), the M D curve shifts to the right. This means that the quantity demanded of money increases at each level of the interest rate. i MD MD M A B i1i1 i2i2 M 2 M 1 i MD(Y1)MD(Y1) M or (P 1) MD(Y2)MD(Y2) or (P 2) 29

Equilibrium in the money market M S = M D Condition for equilibrium of the money market: the demand for money is equal to the supply of money: M S = M D. A change in the equilibrium of the money market occurs due to a change in the demand for money or the supply of money. Equilibrium in the money market is restored due to changes in the interest rate. An increase in the demand for money results in an increase in the interest rate, and an increase in the supply of money leads to a fall in the interest rate, which equalizes the amount of money supplied in the economy with the amount of money demanded. i MDMD M MS1MS1 MS2MS2 i2i2 i1i1 M 1 M 2 A B i2i2 MD(Y1)MD(Y1) M M D (Y 2) MSMS i i1i1 A B M

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Presentation on the topic: Money and banks

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Slide no. 2

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Money is the universal abstract equivalent of all goods. Money is the universal abstract equivalent of all goods. Economic development is based on the division of labor and specialization, necessitating the exchange of produced goods. Initially, goods were exchanged for goods at random. A simple form of value emerged. Then, as the economy developed, the possibility of choice in exchange arose. The owner of the goods could, during the exchange, choose from a number of goods offered. A complete or expanded form of value has emerged. The prototype of money was an equivalent commodity, for which other goods were increasingly exchanged. In different areas these were different goods: axes, sheep, furs, shells. This is how the universal form of value appeared. Then the monetary form of value appeared, because simple natural exchange was inconvenient and, therefore, ineffective. Metallic money is being promoted to the role of universal equivalent.

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At first, the bimetallic system operated, with coins made from both silver and gold. At the end of the nineteenth century it was replaced by the monometallic system, associated with the discovery of large gold deposits in America. At first, the bimetallic system operated, with coins made from both silver and gold. At the end of the nineteenth century it was replaced by the monometallic system, associated with the discovery of large gold deposits in America. In the era of the formation and flourishing of commodity production and free competition, metallic money was freely minted. The amount of money in circulation was automatically regulated by rising prices for goods. The disadvantages of metal money were: cumbersomeness in calculations when it came to large transactions. losses from abrasion of coins per year amounted to up to three thousand kilograms. unproductive costs of maintaining gold circulation. when using gold money, there was no necessary elasticity in relation to the expansion and contraction of the process of production of goods. The money supply was difficult to regulate.

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The process of demonetization of gold has begun. In this regard, gold ceased to be a monetary commodity, but remained a market commodity. Currently, gold is used for the needs of the electronics industry, for dental and medical purposes. The process of demonetization of gold has begun. In this regard, gold ceased to be a monetary commodity, but remained a market commodity. Currently, gold is used for the needs of the electronics industry, for dental and medical purposes. The credit form of money is associated with the appearance of paper money. The predecessors of paper money were warehouse receipts, which were used by jewelers and bankers in Ancient Rome. Jewels were handed over to them for safekeeping, and in return they issued receipts that could be transferred or paid with. Then banknotes appeared - debt obligations of bankers to pay a certain amount of money, and they no longer had a private, but a public guarantee, i.e. had liquidity. Later, the state took over the issue of money, and treasury notes appeared. They represent a promise to pay, not the payment itself. When replacing banknotes with the state, the Copernican-Gresham law applies: “Inconvenient money crowds out convenient money from the sphere of circulation.”

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Currently, several types of money are used: Currently, several types of money are used: Natural money, their role is played by a product that has intrinsic value. The concept of intrinsic value applies to money that will have value even when it is not used as money. Includes all types of goods that were universal equivalents in the initial stages of the development of commodity circulation (livestock, grain, furs, shells, etc.), as well as money made from precious metals. Paper (decreed, symbolic) money is money devoid of intrinsic value. Symbolic money includes paper and credit money. Change coins Bank papers: deposits, checks, bills All of the above is money, because people accept them as payment, expecting, in turn, that money will be accepted from them when buying products. The main reason why people accept money is the ability of the state to guarantee the stability of money.

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Money performs the following functions: Money performs the following functions: Measure of value - in money, the costs of producing goods are recorded, prices for goods are measured. The medium of exchange - money - is an intermediary in the exchange of goods. Means of payment - this function is associated with the discontinuity in time of the movement of money and goods. An example is the provision of goods on credit (the movement of goods occurred, but the movement of money did not) or the moment of receiving wages (only the movement of money occurred). Store of value - this function does not work during inflation; goods of inflationary demand are cars, real estate, and jewelry. World money is when a national currency is used in international trade transactions. Basic properties of money: Liquidity Exchangeability Security Inflation

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All functions of money are described by the Fisher equation: All functions of money are described by the Fisher equation: MV = PQ M - the amount of money in circulation; V is the velocity of circulation of the monetary unit per year; P - price level of goods; Q is the level of real output (the number of goods produced in the national economy over a certain period of time). The money supply indicator M includes: M1, M2, M3,... banknotes current (checking) accounts bank deposits of households bank deposits of enterprises purchase of bank certificates bills of public debt

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LAW OF MONETARY CIRCULATION - the amount of money needed for circulation depends on the sum of the prices of goods to be sold and the speed of money turnover. LAW OF MONETARY CIRCULATION - the amount of money needed for circulation depends on the sum of the prices of goods to be sold and the speed of money turnover. VELOCITY OF MONEY TURNOVER is the number of turnovers of the money supply per year. where each turnover serves the expenditure of income: V = (РхQ)/M Р - price level; O - level of real production volume; M - amount of money Money circulates at different speeds; this depends on many factors, in particular, on the type of goods the sale of which they serve, and in general, on the state of the economy. FACTORS AFFECTING THE SPEED OF MONEY TURNOVER principles of the financial system. habits, opinions and plans for the future of the population. distribution of money supply between different types of organizations and layers of people with different incomes

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The monetary system is a set of financial institutions, various forms and methods of lending. Credit relationships always arise there. where temporarily free funds are formed for some individuals and a temporary need for additional financial resources for others. Intermediaries in credit relations are banks. MONETARY SYSTEM includes: National (central) bank. Commercial banks. Specialized banking institutions (investment banks, foreign trade banks, mortgage banks). Non-banking financial institutions (insurance funds, pension funds, savings banks, investment funds).

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Private lending institutions include: Private lending institutions include: Insurance companies engaged in commercial or health insurance. Investment companies that provide the initial issue of securities, invest individual savings of citizens in securities and carry out trading operations with them. Factoring companies are created to meet payment deadlines and collect funds. Bank (from Italian banco - bench, table on which money changers laid out coins) is a credit and financial institution. Foreign banks based entirely on foreign capital can be created in the country. What they do is they specialize in international operations. provide loans to local national companies. carry out transactions in the national securities market. select potential trading partners for their national firms. provide economic information about the characteristics of the host country market.

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The functions of the National Bank are: The functions of the National Bank are: monetary regulation of the money supply and the level of interest rates. organization of interbank settlements and cash services for commercial banks. establishing, together with the Ministry of Finance, cash execution of the state budget through commercial banks. registration of commercial banks and monitoring their compliance with established mandatory standards, application of banking legislation and regulations issued by the National Bank. control over the opening of branches and representative offices of foreign banks in the country. organization of international payments. regulation of foreign economic banking activities. streamlining the credit market. ensuring a uniform procedure for accounting and reporting in the banking system. exercise of the monopoly right to issue money. providing commercial banks with loans in case of difficulties. issue and redemption of government securities. national repository of wealth.

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The work of commercial banks is based on two postulates: risk and profit. The main sources of credit resources of commercial banks are: funds of the authorized capital, time deposits of the population and enterprises, demand deposits of the population and enterprises, profit received. Commercial banks perform important functions in creating normal conditions for the development of the public economy: they are intermediaries in the accumulation and redistribution of money resources, act as the main creditors of business activities, including the state as a business entity, provide current settlement transactions for clients, including check services for clients, place securities among investors, carry out foreign exchange transactions, and carry out trust transactions.

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There are the following TYPES OF LOANS: There are the following TYPES OF LOANS: Short-term - a loan for a period of up to 1 year provided for the formation of working capital serving the current economic turnover Medium-term - for a period of up to 5 years, necessary for the expansion and improvement of production. Long-term - for a period of up to 10 years, which is a source of capital investment in new construction and reconstruction. This loan is repaid in parts from the profit. Loan interest is the payment of the person taking the loan for the use of funds. Loan interest rate = amount of loan interest / amount of loan capital The loan interest rate depends on the average rate of profit in the country, usually it does not exceed the rate of profit. Determined based on the relationship between supply and demand in the financial market and the refinancing rate of the National Bank.

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Conditions for obtaining a loan: Conditions for obtaining a loan: Providing a business plan. Providing security: pledge of property. pledge of securities. insurance in insurance companies against the risk of non-repayment. bank guarantees. Conditions for issuing loans: Duration of the loan (the loan is issued for a certain period). Loan repayment. The targeted nature of the loan, i.e. A loan is issued by a bank for strictly specified purposes. Securing a loan in the form of collateral of property or securities or insurance of a bank loan. Payment of the loan - for the use of bank money, a percentage is charged from the profit of the enterprise.

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The following FORMS OF LOANS exist: The following FORMS OF LOANS exist: INVESTMENT LOAN is a loan taken to create or expand an enterprise. Borrowed funds are used as capital that generates profit. The profit received is divided into business income, which remains with the borrower, and loan interest, which is returned to the lender. COMMERCIAL LOAN - this term is used in two cases: When a bank issues a loan to a trading organization for the implementation of any commercial transaction, for example, the purchase of a large batch of profitable goods. In case of deferment of payment for a product or service provided to the buyer by the seller of the product.

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FINANCIAL LEASING is the provision of a loan for the rental of equipment. FINANCIAL LEASING is the provision of a loan for the rental of equipment. The leasing company, using its own and borrowed funds, purchases equipment on behalf of the client. Simultaneously with the purchase of equipment, the leasing company signs a rental agreement with the client. After the end of the contract, the equipment may become the property of the lessee. CONSUMER CREDIT is the sale of goods to the population on the terms of payment in installments over a certain period. A MORTGAGE LOAN is a loan issued against property (house, car, cottage), which must be insured.

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Multiplicative expansion and reduction of deposits - the creation (withdrawal) of non-cash money, the fundamental property of the banking system to expand deposits in the process of lending by repeatedly increasing any additional resources coming from outside the system (mainly the central bank by providing them with loans, purchasing securities, foreign currency) , as well as reducing deposits when these resources are reduced. Multiplicative expansion and reduction of deposits - the creation (withdrawal) of non-cash money, the fundamental property of the banking system to expand deposits in the process of lending by repeatedly increasing any additional resources coming from outside the system (mainly the central bank by providing them with loans, purchasing securities, foreign currency) , as well as reducing deposits when these resources are reduced.

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In order to understand the mechanism of functioning of the monetary market, it is necessary to consider the demand for money and its supply. In order to understand the mechanism of functioning of the monetary market, it is necessary to consider the demand for money and its supply. DEMAND FOR MONEY is the money needed by households and businesses to complete purchase and sale transactions. FACTORS AFFECTING MONEY DEMAND: The quantity of goods, services and factors of production offered for sale.

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The graph shows that the demand for money is inversely proportional to the movement of interest rates, both in the case of a choice between purchasing bonds and placing money in a bank, and in the case of taking out a loan. The graph shows that the demand for money is inversely proportional to the movement of interest rates, both in the case of a choice between purchasing bonds both by placing money in a bank and in the case of taking out a loan

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The level of prices for goods offered, services and factors of production. A higher price level requires more money. The level of prices for goods offered, services and factors of production. A higher price level requires more money. The amount of total income that determines the quantity of goods purchased. The speed of money turnover - the higher it is, the less money is required. Let us summarize the above: “The higher the total income and prices, the lower the turnover rate, the more money is needed to service the movement of goods, services of production factors.” Let us express this in the form of a formula: (PxY)/V+L(r) D - demand for money . P - prices for goods. Y is the volume of total income. V is the speed of money turnover. r is the level of interest rates.

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THE SUPPLY OF MONEY is organized by the state represented by the National Bank through the issue of money and through the management of commercial banks. THE SUPPLY OF MONEY is organized by the state represented by the National Bank through the issue of money and through the management of commercial banks. MONEY ISSUE - issue by the National Bank of paper money. It is he who determines how many of them will be in circulation. Let us introduce such a concept as MONETARY AGGREGATES, i.e. combined MONEY SUPPLY. Let us explain that aggregation is the combination of individual units or data into a single indicator. Aggregate M1 is the supply of money in the form of cash in circulation (paper and metal) and deposits in banks for which checks can be written. The emergence of bank deposits is related to this. that payment for goods can be either in cash - using paper money, or non-cash, by transferring the required amount from account to account. A non-cash form of payment is preferable, firstly, it is safer, and secondly, 80% of all cash payments do not bring profit. Aggregate M2 is the supply of money in cash and in the form of checkable deposits plus highly liquid financial assets. The MZ aggregate is a combination of the M2 aggregate and large time deposits (enterprise certificates of deposit)

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It is believed that there are three main reasons why people prefer to keep their savings in the form of cash and in current accounts: It is believed that there are three main reasons why people prefer to keep their savings in the form of cash and in current accounts: Transaction motive - cash is easier to pay for purchases if necessary. The precautionary motive - there may be a need to urgently pay for a purchase and the money should be at hand. Speculative motive - arises from a person’s desire to avoid capital losses in the event of an unsuccessful investment in bonds, stocks or other securities. Keynes drew attention to the following trend: the quantity of money demand gradually falls with the fall in the interest rate on the securities market.

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CHANGE IN THE DISCOUNT RATE CHANGE IN THE DISCOUNT RATE RATE is the percentage at which the National Bank provides loans to commercial banks. Commercial banks from time to time experience a need for financial resources. They act as borrowers and can contact another commercial bank or the National Bank of the Republic. The National Bank, when providing loans to commercial banks, can pursue a policy of “expensive” or “cheap” money. An increase in the discount rate reduces the willingness of banks to take out loans and thereby reduces the aggregate money supply. CHANGES IN THE REQUIREMENT RESERVE REQUIREMENT REQUIREMENT RESERVE is part of the credit funds of commercial banks, which must be transferred to a special reserve account in the National Bank. The required reserve rate is established by the National Bank of the Republic. Firstly, this is done in order to insure part of the deposits of bank clients if a commercial bank becomes insolvent. Secondly, by increasing the required reserve ratio. The National Bank limits the use of funds by the bank and thereby suppresses the business activity of entrepreneurs. And vice versa, reducing the reserve rate. The National Bank facilitates the release of funds and thereby increases business activity.

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OPEN MARKET OPERATIONS OPEN MARKET OPERATIONS This is the purchase or sale of government securities - government bonds, treasury bills in order to regulate the money supply. This is a market measure that does not involve any coercion on the part of the state. The initiator of open market operations is always the state. It operates through the National Bank. The second participant in transactions are commercial banks or the public. Depending on the policy pursued by the state, economic entities act either as sellers or as buyers. CARRYING OUT DENOMINATION DENOMINATION is the enlargement of a monetary unit in order to make the national currency more valuable. Redenomination is carried out if, as a result of high inflation, money has greatly reduced its purchasing power.

Slide description:

An increase in national income shifts the money demand curve upward and to the right. The money supply remained at the same level. To replenish cash reserves, business entities will begin to sell securities and apply for loans. This will lead to a decrease in the market price of securities and an increase in the loan interest rate. An increase in national income shifts the money demand curve upward and to the right. The money supply remained at the same level. To replenish cash reserves, business entities will begin to sell securities and apply for loans. This will lead to a decrease in the market price of securities and an increase in the loan interest rate.

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Now suppose that the money supply has changed as a result of a change in the monetary policy of the National Bank. He sold securities on the open market, reducing the amount of money in circulation. Now suppose that the money supply has changed as a result of a change in the monetary policy of the National Bank. He sold securities on the open market, reducing the amount of money in circulation.

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An increase in demand shifts the demand curve upward and to the right. The money supply curve MS is fixed at 10%. An increase in demand shifts the demand curve upward and to the right. The money supply curve MS is fixed at 10%. The shift in demand tends to increase interest rates. The National Bank, not wanting to allow this to happen, buys securities from banks. Bank reserves are increasing, the money supply is growing, the goal has been achieved, rates have remained at the same level.

Slide description:

Using this model, you can study the interaction of the markets for money and goods. You can find out how stable their joint equilibrium is, how long it lasts, and how certain options for government regulation will affect it. Using this model, you can study the interaction of the markets for money and goods. You can find out how stable their joint equilibrium is, how long it lasts, and how certain options for government regulation will affect it.

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THE MECHANISM OF THE MONEY MARKET is as follows: THE MECHANISM OF THE MONEY MARKET is as follows: If the interest rate exceeds the equilibrium level, then the speculative demand for money will decrease, since owners of savings will use it to purchase securities. The demand for these securities will increase, and hence their prices, which will affect the interest rate. It will begin to decline to the equilibrium level. This is explained by the fact that the situation on the securities market is associated with fluctuations in interest rates. If interest rates are high, then securities are relatively cheap (an alternative to investing savings). If the interest rate is below the equilibrium level, then the number of people willing to keep their savings in securities will decrease and the demand for them will fall. This will lead to an increase in the level of interest rates to a state of equilibrium. This is explained by the fact that the owners of a certain amount of money believe that with a low interest rate, securities are too expensive. They refuse to purchase them, waiting for more favorable conditions.

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You can quickly make a decision and implement it in practice. You can quickly make a decision and implement it in practice. Monetary policy is more flexible in the socio-political sense. The return from it is faster. If fiscal policy affects the commodity market, then monetary policy affects the financial market. If the demand for money has changed due to changes in the speed of money turnover, then in this case it is necessary to separate real economic processes and the consequences of changes in the speed of money turnover. To do this, the amount of money in circulation must change according to the speed of circulation of money, naturally, in the opposite direction. If a shift in the demand for money occurred due to changes in the volume of production due to a change in the phase of the economic cycle, then, depending on the phase, it is necessary to either increase interest rates (rise phase) or reduce them (decline phase). If the demand for money is due to rising prices, then it is recommended to maintain a constant amount of money in circulation, making the interest rate free.

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The principle of Estonian monetary policy since the introduction of the kroon is the currency committee, that is, a currency is pegged to the rate of another currency and their rates simultaneously change relative to other currencies, while remaining unchanged relative to each other. At first it was 1 German mark = 8 kroner, now 1 euro = 15.65 kroner. The Estonian kroon is not quoted on the world market, so for small countries the principle of a currency board has a stabilizing effect. The Bank of Estonia does not have the right to issue additional money except for technical needs (replacement of worn-out banknotes). Estonia does not have a gold reserve pegging system. The principle of Estonian monetary policy since the introduction of the kroon is the currency committee, that is, a currency is pegged to the rate of another currency and their rates simultaneously change relative to other currencies, while remaining unchanged relative to each other. At first it was 1 German mark = 8 kroner, now 1 euro = 15.65 kroner. The Estonian kroon is not quoted on the world market, so for small countries the principle of a currency board has a stabilizing effect. The Bank of Estonia does not have the right to issue additional money except for technical needs (replacement of worn-out banknotes). Estonia does not have a gold reserve pegging system. The Government and the Bank of Estonia remain fully committed to the currency board system and the current fixed ratio between the kroon and the euro. This is considered to provide sufficient framework conditions for participation in the European Monetary Union (ERM2).

Money and banks

Economy

Money is a special commodity.

Without them, our life today would be impossible.

Functions of money

• Firstly, they are a means of circulation, that is, they help goods to be exchanged, bypassing the difficulties of barter. Secondly, we use money to measure the value of various goods. Thirdly, money serves as a store of value.
• Firstly, they are a means of circulation, that is, they help goods to be exchanged, bypassing the difficulties of barter.
• Secondly, we use money to measure the value of various goods.
• Thirdly, money serves as a store of value.

Money performs three main functions in the economy.

History of money

In the history of mankind, various goods were used as money: livestock, furs, shells, salt... Then in most countries they decided to make precious metals - gold and silver - money, since these metals had certain properties that allowed them to best perform the functions of money:

• Well preserved so that they do not quickly deteriorate or wear out. The ability to be divided into small parts to reflect small differences in value. Great value in a small amount to make storing and transporting money easier.
• Well preserved so that they do not quickly deteriorate or wear out.
• The ability to be divided into small parts to reflect small differences in value.
• Great value in a small amount to make storing and transporting money easier.

Money now

Currently, money is special papers and coins (banknotes) issued by the central bank of each state. They do not have any independent value, unlike precious metals. They are given value only by the authority of the state that issues them.

Money market

Money (more precisely, not money itself, but the ability to manage other people’s money for some time) can also be bought and sold on the market, like any other product. The main sellers in this market are households, buyers are firms, and intermediaries are banks.

History of banks

The first bankers in history were jewelers. Other people began to take advantage of this; they left some valuables with the jewelers for safekeeping. Some clients did not always come for their goods, so the jewelers gave away most of the gold at interest for a while. This is how the first bankers and banks appeared.

Banks currently

Nowadays, people who deposit money in a bank not only do not pay for storage, but also receive profit from the bank, because the bank is interested in attracting people's money.

Bank profit

Banks make money because the interest they receive from borrowers is greater than the interest they pay to depositors.

Interest rate and its types

Interest rate- an amount indicated as a percentage of the loan amount that the recipient of the loan pays for using it for a certain period. There are several types of interest rates.

• Fixed and floating rates.
• Decursive and anticipatory bets.
• Real and nominal rates.

Fixed and floating rates

Depending on whether the rate changes over time, fixed and floating interest rates are distinguished.

Fixed interest rate - permanent, established for a certain period and does not depend on any circumstances.

Floating interest rate subject to periodic review. The rate is changed based on fluctuations in certain indicators.

Decursive and anticipatory bets

Depending on the timing of interest payments, there are two types of interest rates.

Decursive rate- Interest is paid at the end along with the principal amount of the loan.

Anticipatory rate- interest is paid at the time the loan is granted (in advance) and is determined based on the final amount of the debt.

Real and nominal rates

Real interest rate- This is the interest rate taking into account inflation.

Nominal interest rate- a percentage that does not take into account market inflation.

Banking Occupations

In addition to making deposits and issuing loans, modern banks are engaged in other important matters. Almost all payments between companies are carried out through them.

Banks also invest part of their money in securities.

Bank Reserves

Banks must always be ready to pay out money to the depositor. Therefore, they do not lend out a certain part of their deposits, but keep them in the form of reserves.

Slide 2

1. Types of money and the law of monetary circulation.

Money is the universal abstract equivalent of all goods. Economic development is based on the division of labor and specialization, necessitating the exchange of produced goods. Initially, goods were exchanged for goods at random. A simple form of value emerged. Then, as the economy developed, the possibility of choice in exchange arose. The owner of the goods could, during the exchange, choose from a number of goods offered. A complete or expanded form of value has emerged. The prototype of money was an equivalent commodity, for which other goods were increasingly exchanged. In different areas these were different goods: axes, sheep, furs, shells. This is how the universal form of value appeared. Then the monetary form of value appeared, because simple natural exchange was inconvenient and, therefore, ineffective. Metallic money is being promoted to the role of universal equivalent.

Slide 3

At first, the bimetallic system operated, with coins made from both silver and gold. At the end of the nineteenth century it was replaced by the monometallic system, associated with the discovery of large gold deposits in America. In the era of the formation and flourishing of commodity production and free competition, metallic money was freely minted. The amount of money in circulation was automatically regulated by rising prices for goods. The disadvantages of metal money were: cumbersomeness in calculations when it came to large transactions. losses from abrasion of coins per year amounted to up to three thousand kilograms. unproductive costs of maintaining gold circulation. when using gold money, there was no necessary elasticity in relation to the expansion and contraction of the process of production of goods. The money supply was difficult to regulate.

Slide 4

The process of demonetization of gold has begun. In this regard, gold ceased to be a monetary commodity, but remained a market commodity. Currently, gold is used for the needs of the electronics industry, for dental and medical purposes. The credit form of money is associated with the appearance of paper money. The predecessors of paper money were warehouse receipts, which were used by jewelers and bankers in Ancient Rome. Jewels were handed over to them for safekeeping, and in return they issued receipts that could be transferred or paid with. Then banknotes appeared - debt obligations of bankers to pay a certain amount of money, and they no longer had a private, but a public guarantee, i.e. had liquidity. Later, the state took over the issue of money, and treasury notes appeared. They represent a promise to pay, not the payment itself. When replacing banknotes with the state, the Copernican-Gresham law applies: “Inconvenient money crowds out convenient money from the sphere of circulation.”

Slide 5

Currently, several types of money are used: Natural money, their role is played by a product with intrinsic value. The concept of intrinsic value applies to money that will have value even when it is not used as money. Includes all types of goods that were universal equivalents in the initial stages of the development of commodity circulation (livestock, grain, furs, shells, etc.), as well as money made from precious metals. Paper (decreed, symbolic) money is money devoid of intrinsic value. Symbolic money includes paper and credit money. Change coins Bank papers: deposits, checks, bills All of the above is money, because people accept them as payment, expecting, in turn, that money will be accepted from them when buying products. The main reason why people accept money is the ability of the state to guarantee the stability of money.

Slide 6

Money performs the following functions: Measure of value - in money, the costs of producing goods are recorded, prices for goods are measured. The medium of exchange - money - is an intermediary in the exchange of goods. Means of payment - this function is associated with the discontinuity in time of the movement of money and goods. An example is the provision of goods on credit (the movement of goods occurred, but the movement of money did not) or the moment of receiving wages (only the movement of money occurred). Store of value - this function does not work during inflation; goods of inflationary demand are cars, real estate, and jewelry. World money is when a national currency is used in international trade transactions. Basic properties of money: Liquidity Exchangeability Security Inflation

Slide 7

All functions of money are described by the Fisher equation: MV = PQ M - the amount of money in circulation; V is the velocity of circulation of the monetary unit per year; P - price level of goods; Q is the level of real output (the number of goods produced in the national economy over a certain period of time). The money supply indicator M includes: M1, M2, M3,... banknotes current (checking) accounts bank deposits of households bank deposits of enterprises purchase of bank certificates bills of public debt M2 M3 M1 M4

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LAW OF MONETARY CIRCULATION - the amount of money needed for circulation depends on the sum of the prices of goods to be sold and the speed of money turnover. VELOCITY OF MONEY TURNOVER is the number of turnovers of the money supply per year. where each turnover serves the expenditure of income: V = (РхQ)/M Р - price level; O - level of real production volume; M - amount of money Money circulates at different speeds; this depends on many factors, in particular, on the type of goods the sale of which they serve, and in general, on the state of the economy. FACTORS AFFECTING THE SPEED OF MONEY TURNOVER principles of the financial system. habits, opinions and plans for the future of the population. distribution of money supply between different types of organizations and layers of people with different incomes

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2. The structure of the monetary system.

The monetary system is a set of financial institutions, various forms and methods of lending. Credit relationships always arise there. where temporarily free funds are formed for some individuals and a temporary need for additional financial resources for others. Intermediaries in credit relations are banks. MONETARY SYSTEM includes: National (central) bank. Commercial banks. Specialized banking institutions (investment banks, foreign trade banks, mortgage banks). Non-banking financial institutions (insurance funds, pension funds, savings banks, investment funds).

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Private lending institutions include: Insurance companies engaged in commercial or health insurance. Investment companies that provide the initial issue of securities, invest individual savings of citizens in securities and carry out trading operations with them. Factoring companies are created to meet payment deadlines and collect funds. Bank (from Italian banco - bench, table on which money changers laid out coins) is a credit and financial institution. Foreign banks based entirely on foreign capital can be created in the country. What they do is they specialize in international operations. provide loans to local national companies. carry out transactions in the national securities market. select potential trading partners for their national firms. provide economic information about the characteristics of the market of the host country.

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The functions of the National Bank are: monetary regulation of the money supply and the level of interest rates. organization of interbank settlements and cash services for commercial banks. establishing, together with the Ministry of Finance, cash execution of the state budget through commercial banks. registration of commercial banks and monitoring their compliance with established mandatory standards, application of banking legislation and regulations issued by the National Bank. control over the opening of branches and representative offices of foreign banks in the country. organization of international payments. regulation of foreign economic banking activities. streamlining the credit market. ensuring a uniform procedure for accounting and reporting in the banking system. exercise of the monopoly right to issue money. providing commercial banks with loans in case of difficulties. issue and redemption of government securities. national repository of wealth.

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3. The system of commercial banks and their functions.

The work of commercial banks is based on two postulates: risk and profit. The main sources of credit resources of commercial banks are: funds of the authorized capital, time deposits of the population and enterprises, demand deposits of the population and enterprises, profit received. Commercial banks perform important functions in creating normal conditions for the development of the public economy: they are intermediaries in the accumulation and redistribution of monetary resources, act as the main creditors of business activities, including the state as a business entity, provide current settlement transactions for clients, including check services for clients, place securities among investors, carry out foreign exchange transactions, and carry out trust transactions.

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There are the following TYPES OF LOANS: Short-term - a loan for a period of up to 1 year, provided for the formation of working capital serving the current economic turnover; Medium-term - for a period of up to 5 years, necessary for the expansion and improvement of production. Long-term - for a period of up to 10 years, which is a source of capital investment in new construction and reconstruction. This loan is repaid in parts from the profit. Loan interest is the payment of the person taking the loan for the use of funds. Loan interest rate = amount of loan interest / amount of loan capital The loan interest rate depends on the average rate of profit in the country, usually it does not exceed the rate of profit. Determined based on the relationship between supply and demand in the financial market and the refinancing rate of the National Bank.

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Conditions for obtaining a loan: Providing a business plan. Providing security: pledge of property. pledge of securities. insurance in insurance companies against the risk of non-repayment. bank guarantees. Conditions for issuing loans: Duration of the loan (the loan is issued for a certain period). Loan repayment. The targeted nature of the loan, i.e. A loan is issued by a bank for strictly specified purposes. Securing a loan in the form of collateral of property or securities or insurance of a bank loan. Payment of the loan - for the use of bank money, a percentage is charged from the profit of the enterprise.

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There are the following FORMS OF LOANS: INVESTMENT LOAN - this is a loan taken to create or expand an enterprise. Borrowed funds are used as capital that generates profit. The profit received is divided into business income, which remains with the borrower, and loan interest, which is returned to the lender. COMMERCIAL LOAN - this term is used in two cases: When a bank issues a loan to a trading organization for the implementation of any commercial transaction, for example, the purchase of a large batch of profitable goods. In case of deferment of payment for a product or service provided to the buyer by the seller of the product.

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FINANCIAL LEASING is the provision of a loan for the rental of equipment. The leasing company, using its own and borrowed funds, purchases equipment on behalf of the client. Simultaneously with the purchase of equipment, the leasing company signs a rental agreement with the client. After the end of the contract, the equipment may become the property of the lessee. CONSUMER CREDIT is the sale of goods to the population on the terms of payment in installments over a certain period. A MORTGAGE LOAN is a loan issued against property (house, car, cottage), which must be insured.

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Multiplicative expansion and reduction of deposits - the creation (withdrawal) of non-cash money, the fundamental property of the banking system to expand deposits in the process of lending by repeatedly increasing any additional resources coming from outside the system (mainly the central bank by providing them with loans, purchasing securities, foreign currency) , as well as reducing deposits when these resources are reduced.

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4. Money and credit market.

In order to understand the mechanism of functioning of the monetary market, it is necessary to consider the demand for money and its supply. DEMAND FOR MONEY is the money needed by households and businesses to complete purchase and sale transactions. FACTORS AFFECTING MONEY DEMAND: The quantity of goods, services and factors of production offered for sale. On the graph: r - interest rate. Dm - demand for money for transactions. The graph shows us that the amount of money for transactions does not depend on the interest rate, because people need food and clothing, and firms must pay wages, buy raw materials, pay for electricity

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The graph shows that the demand for money is inversely proportional to the movement of interest rates, both in the case of a choice between purchasing bonds and placing money in a bank, and in the case of taking out a loan. Movement in interest rates, the higher the rates, the lower the demand, the lower the rates, the higher the demand

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The level of prices for goods offered, services and factors of production. A higher price level requires more money. The amount of total income that determines the quantity of goods purchased. The speed of money turnover - the higher it is, the less money is required. Let us summarize the above: “The higher the total income and prices, the lower the turnover rate, the more money is needed to service the movement of goods, services of production factors.” Let us express this in the form of a formula: (PxY)/V+L(r) D - demand for money . P - prices for goods. Y is the volume of total income. V is the speed of money turnover. r is the level of interest rates.

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THE SUPPLY OF MONEY is organized by the state represented by the National Bank through the issue of money and through the management of commercial banks. MONEY ISSUE - issue by the National Bank of paper money. It is he who determines how many of them will be in circulation. Let us introduce such a concept as MONETARY AGGREGATES, i.e. combined MONEY SUPPLY. Let us explain that aggregation is the combination of individual units or data into a single indicator. Aggregate M1 is the supply of money in the form of cash in circulation (paper and metal) and deposits in banks on which checks can be written. The emergence of bank deposits is related to this. that payment for goods can be either in cash - using paper money, or non-cash, by transferring the required amount from account to account. A non-cash form of payment is preferable, firstly, it is safer, and secondly, 80% of all cash payments do not bring profit. Aggregate M2 is the supply of money in cash and in the form of checkable deposits plus highly liquid financial assets. The MZ aggregate is a combination of the M2 aggregate and large time deposits (enterprise certificates of deposit)

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It is believed that there are three main reasons why people prefer to keep their savings in the form of cash and in checking accounts: Transaction motive - cash is easier to pay for a purchase when needed. The precautionary motive - there may be a need to urgently pay for a purchase and the money should be at hand. Speculative motive - arises from a person’s desire to avoid capital losses in the event of an unsuccessful investment in bonds, stocks or other securities. Keynes drew attention to the following trend: the quantity of money demand gradually falls with the fall in the interest rate on the securities market.

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CHANGE IN THE DISCOUNT RATE The rate is the percentage at which the National Bank provides loans to commercial banks. Commercial banks from time to time experience a need for financial resources. They act as borrowers and can contact another commercial bank or the National Bank of the Republic. The National Bank, when providing loans to commercial banks, can pursue a policy of “expensive” or “cheap” money. An increase in the discount rate reduces the willingness of banks to take out loans and thereby reduces the aggregate money supply. CHANGES IN THE REQUIREMENT RESERVE REQUIREMENT REQUIREMENT RESERVE is part of the credit funds of commercial banks, which must be transferred to a special reserve account in the National Bank. The required reserve rate is established by the National Bank of the Republic. Firstly, this is done in order to insure part of the deposits of bank clients if a commercial bank becomes insolvent. Secondly, by increasing the required reserve ratio. The National Bank limits the use of funds by the bank and thereby suppresses the business activity of entrepreneurs. And vice versa, reducing the reserve rate. The National Bank facilitates the release of funds and thereby increases business activity. The National Bank regulates monetary circulation through the following measures:

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OPEN MARKET OPERATIONS This is the purchase or sale of government securities - government bonds, treasury bills for the purpose of regulating the money supply. This is a market measure that does not involve any coercion on the part of the state. The initiator of open market operations is always the state. It operates through the National Bank. The second participant in transactions are commercial banks or the public. Depending on the policy pursued by the state, economic entities act either as sellers or as buyers. CARRYING OUT DENOMINATION DENOMINATION is the enlargement of a monetary unit in order to make the national currency more valuable. Redenomination is carried out if, as a result of high inflation, money has greatly reduced its purchasing power.

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Let's consider EQUILIBRIUM IN THE MONEY MARKET: As in any market, monetary equilibrium is achieved at the point of intersection of the supply and demand schedules, which corresponds to a certain interest rate. Achieving equilibrium means that the amount of money that economic entities would like to have at their disposal is equal to the amount of money that the monetary system offers when implementing a certain policy. The left graph characterizes monetary equilibrium when the National Bank pursues a policy of maintaining a constant level of money supply. The quantity of money supplied by the banking system remains constant regardless of changes in the interest rate or the demand for money. If the National Bank pursues a policy of fixing the interest rate at a certain level through open market operations, the money supply curve will run horizontally.

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An increase in national income shifts the money demand curve upward and to the right. The money supply remained at the same level. To replenish cash reserves, business entities will begin to sell securities and apply for loans. This will lead to a decrease in the market price of securities and an increase in the loan interest rate. Let us consider deviations from the state of equilibrium in the monetary market. They can arise from both changes in demand and changes in the supply of money. First, suppose that the demand for money changes due to a change in national income

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Now suppose that the money supply has changed as a result of a change in the monetary policy of the National Bank. He sold securities on the open market, reducing the amount of money in circulation. This graph demonstrates a situation where, as a result of the sale of securities by the National Bank, the supply curve will shift to the left. Banks that bought securities at favorable rates reduced their cash reserves. To replenish bank reserves, they will have to resort to selling their securities and tightening the conditions for providing loans. At the new equilibrium point E2, the interest rate has increased, and the amount of money in circulation has decreased.

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An increase in demand shifts the demand curve upward and to the right. The money supply curve MS is fixed at 10%. The shift in demand tends to increase interest rates. The National Bank, not wanting to allow this to happen, buys securities from banks. Bank reserves are increasing, the money supply is growing, the goal has been achieved, rates have remained at the same level. Suppose that as a result of an increase in national income, demand has increased, but the supply of money is fixed.

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This is the famous Hicks-Hansen "ISLM" model. which is an abbreviation of the English terms “investment-savings-liquidity-money”. It describes the joint general equilibrium of the goods and money markets, which is achieved at point T, which corresponds to the values ​​of interest r and income Y. If we return to the conditions of equilibrium of the goods market and If we combine this equilibrium curve with the equilibrium curve of the money market (they are located in the same coordinates), we will notice that both curves depend on the same values ​​of interest and income.

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Using this model, you can study the interaction of the markets for money and goods. You can find out how stable their joint equilibrium is, how long it lasts, and how certain options for government regulation will affect it. For example, the economy is stable, equilibrium has been established at point A. Optimistic entrepreneurs, focusing on the current interest rate r1, increase investment using existing savings. Then the state of commodity markets will be described by the new curve IS2. The expansion of production will lead to an increase in income level y1 to level y2. Due to rising incomes, the demand for money will increase. As a result, the interest rate will increase from r1 to r2. Manufacturers, taking into account the declining profitability in conditions of expensive credit, will reduce investments. As a result, production and income will decrease and a new equilibrium will be established at point B.

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THE MECHANISM OF THE MONEY MARKET is as follows: If the interest rate exceeds the equilibrium level, then the speculative demand for money will decrease, since owners of savings will use it to purchase securities. The demand for these securities will increase, and hence their prices, which will affect the interest rate. It will begin to decline to the equilibrium level. This is explained by the fact that the situation on the securities market is associated with fluctuations in interest rates. If interest rates are high, then securities are relatively cheap (an alternative to investing savings). If the interest rate is below the equilibrium level, then the number of people willing to keep their savings in securities will decrease and the demand for them will fall. This will lead to an increase in the level of interest rates to a state of equilibrium. This is explained by the fact that the owners of a certain amount of money believe that with a low interest rate, securities are too expensive. They refuse to purchase them, waiting for more favorable conditions.

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POSITIVE ASPECTS OF CREDIT AND MONETARY POLICY:

You can quickly make a decision and implement it in practice. Monetary policy is more flexible in the socio-political sense. The return from it is faster. If fiscal policy affects the commodity market, then monetary policy affects the financial market. If the demand for money has changed due to changes in the speed of money turnover, then in this case it is necessary to separate real economic processes and the consequences of changes in the speed of money turnover. To do this, the amount of money in circulation must change according to the speed of circulation of money, naturally, in the opposite direction. If a shift in the demand for money occurred due to changes in the volume of production due to a change in the phase of the economic cycle, then, depending on the phase, it is necessary to either increase interest rates (rise phase) or reduce them (decline phase). If the demand for money is due to rising prices, then it is recommended to maintain a constant amount of money in circulation, making the interest rate free.

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The currency committee system and monetary policy of Estonia.

The principle of Estonian monetary policy since the introduction of the kroon is the currency committee, that is, a currency is pegged to the rate of another currency and their rates simultaneously change relative to other currencies, while remaining unchanged relative to each other. At first it was 1 German mark = 8 kroner, now 1 euro = 15.65 kroner. The Estonian kroon is not quoted on the world market, so for small countries the principle of a currency board has a stabilizing effect. The Bank of Estonia does not have the right to issue additional money except for technical needs (replacement of worn-out banknotes). Estonia does not have a gold reserve pegging system. The Government and the Bank of Estonia remain fully committed to the currency board system and the current fixed ratio between the kroon and the euro. This is considered to provide sufficient framework conditions for participation in the European Monetary Union (ERM2).

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