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Money, Financial System, and inflation

by: Emmaroseglaser

Money, Financial System, and inflation Econ3020

Marketplace > Tulane University > Economcs > Econ3020 > Money Financial System and inflation
Intermediate Macroeconomics
Antonio Bojanic

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About this Document

Here, we learn what money is, how the fed impacts the money supply, quantity theory of money, and begin inflation
Intermediate Macroeconomics
Antonio Bojanic
Class Notes
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This 3 page Class Notes was uploaded by Emmaroseglaser on Sunday October 18, 2015. The Class Notes belongs to Econ3020 at Tulane University taught by Antonio Bojanic in Fall 2015. Since its upload, it has received 19 views. For similar materials see Intermediate Macroeconomics in Economcs at Tulane University.


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Date Created: 10/18/15
Money Financial System and In ation Money More than just the currency Money does not equal income income is a ow and money is a stock 1 Medium of exchange a Allows for purchase through trade Acts as a form of payment 2 Unit of account a Value of things in a common currency b In the case of hyperin ation we lose unit of account due to inaccurate values 3 Store of value a Money is an asset so more money means more wealth b Other assets such as stocks are also stores of values c DIFFERENCE Money is the most liquid asset d Hyperin ation money is not a good store of value People store assets elsewhere such as gold Barter Economy Inef cient No medium of exchange 0 Double coincidence of wants If I want to buy something in a barter economy I must nd someone who has what I want Then he must want something that I have 0 Millions of units of accounts 1 car 1000 TVs 500 computers The Federal Reserves Central Bank Divided into 12 districts with federal reserves banks 0 Each district has a president who is appointed by board of governors Board of Governors 7 members appointed by president of US and approved by congress Federal Open Market Committee FOMC 12 people 7 board of governors chairman of Fed of New York 4 rotating chairmen of remaining 11 district Feds o In charge of monetary policy open market operations Meets 8 times per year more if economic unrest The Fed is controversial because there are no checks and balances or any regulations from the government Open Market Operations 1 Fed buys securities from banks a The banks will receive cash for their securities b They lend out this cash c Money supply increases 2 Fed sells securities to banks a Takes their money and turns it into securities b Less money to lend c Money supply shrinks Fed tries to in uence interest rates not the amount of money in circulation This is because it can in uence banks through interest rates Also there are forms of money that are controlled by no banks or external sources so if they pull money out it has less effects Types of money according to the Fed M1 Medium of exchange that can be immediately utilized 1 Currency held in nonbank public including cash being held abroad as means of storing value 2 Travelers checks 3 Demand deposits 4 Checkable deposits M2 Near money that is highly liquid and could be easily turned to M1 1 M1 2 Time deposits CDs 3 Savings deposits 4 Money market mutual fund Quantity Theory of Money V P x Y M Equation of exchange 0 Quantity of money x velocity total spending 0 M quantity of money 0 P x Y total spending 0 V velocity of money number of time a bill changes hand in a year Assume exible priceswages completely determined by factor market Velocity of money is the result of societal characteristics 0 In the US if we are more dependent on creditdebit the dollar bills will not be used and this would cause quantity of money M to decrease So for the same amount of total spending PY velocity must increase Velocity becomes constant over time because V Quantity Theory of money demand 1 M PYN 2 k 1v a constant because V is constant 3 Mdzkyp a demand for real money balances b expresses in terms of how much purchasing power the money has c proportional to income we need this quantity of money to sustain this level of spending Classical dichotomy 1 If wages and prices are exible the means of production are determined only by the quantity of factors of production 2 How much a country produces is determined by A K and L not prices 3 In long run output is determined by AKL 4 In short run priceswages have an impact Also Y is a constant in short run aP MVM f i If M increases P increases and vice versa ii Velocity and Y are constant and have no affect ln a on In ation is solely a monetary phenomenon It is only a result of increase in money supply Central bank can directly affect levels of in ation Neutrality of money money quantity has no affect on how much a country can produce classical dichotomy Change in percent of quantity of money change in percent of velocity of money change in percent of price change in percent of gdp AMAVAPAY A P AM AV AY AM AY Visaconstant In the long term the classicals have been right about the relationship between in ation and growth rate of monetary supply However in the short run there is no correlation In short run you cannot assume neutrality of money Prices and wages are not exible they do affect output


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