Saturday, May 2, 2009

Ratio of time Deposits Desired by the public

Changes in national income and interest rate do, However, effect the portfolio holdings of monetary assets of the public. As national income rises, we expect that ratio of currency to income will fall, since larger transaction in dollar terms tend to be paid for by check. The ratio of time deposits, on the other hand, can be expected to increase as national income increases, since time deposits, unlike demand deposits, may be regarded as "luxury goods" of which more are demanded to higher levels of income. In fact, by the 1970s time deposits of commercial banks greatly exceeded the dollar amount of demand deposits. At the end of 1976, time deposits at all commercial banks totaled $492.2 billion,which was nearly double the amount of " other demand deposits" at these banks. ("Other demand deposits" were $288.4 billion,interbank demand deposits were $45.4 billion, and U.S. government deposits were $3 billion.)
Time deposits seem to bear an inverse relationship to market rates of interest, so that the public shifts out of holdings of time deposits into other money market assets,e.g., Treasury bills, when market yields rise, and vice versa.

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