Treasury auction process

· Competitive {yield and quantity- broker/dealers, institutions, money management firms}and non-competitive {quantity only, individual investors} bids.
· Single-Price Auction (with the help of competitive bids, ranked from lowest to highest yield demanded, identify the stop yield where quantity offered equals quantity demanded, then fill
· competitive and noncompetitive bids at the price implied by the stop yield.
· Multiple-price or “ Dutch” Auction(ranked and each group of bidders paid a different price . Dutch auctions held by Fed NY.

Economics functions of depository institutions

Economics functions :

• Provide liquidity – use short term deposits to make long term loans
• Lower the cost of borrowing money
• Pool the risk associated with lending money and monitor the risk

Fractional reserve banking system:
The Fed requires all deposit-taking banks to hold a fraction of those deposits as reserves. Since these reserves do not earn interest, banks try not to hold any excess reserves.

The Required Reserve Ratio:
The percentage of a particular liability category (to the bank), such as savings accounts, that must be held as reserves.

Basic functions and components of money

Basic functions of money:

• medium of exchange
• unit of value
• store of value

The problem of using money as a way to store value:

• inflation destroy the value of money
• some form of money do not pay interests

Components of money
Monetary base

• The total amount of a currency that is either circulated in the hands of the public or in the commercial bank deposits held in the central bank's reserves. This measure of the money supply typically only includes the most liquid currencies.
  
  M1 = notes and coins in circulation + demand deposits + other checkable deposits such as NOW accounts + traveler’s checks.
  
  M2 = M1 + money market deposits + money market mutual funds held by individuals +overnight Eurodollar deposits and repurchase agreements + time deposits of less than $100,000.

Note:

• Credit is not a purchasing power but a facilitator of purchasing power, i.e ability to borrow money, and thus not counted as money supply.
• Checks is a claim to the checking account in M1 and thus won’t count as money supply.

Problems in measuring money supply in the US:

• Widespread use of US dollars outside of the US.
• No-load mutual funds as substitutes for time deposits.
• Debit cards and electronic money as substitutes for physical currency.