Topic 6 Money and Monetary Policy.ppt

1、Chapter SixMoney and Monetary Policy,Goals of the Chapter,To identify the definition of Money To identify the functions of Money To know the criteria of being Money To know the measurement of Money To know the relationship between Money any asset, whether money, stocks, bonds, land, houses, art, can

2、 be used to store wealth. liquidity, the relative ease and speed with which an asset can be converted into a medium of exchange.,Rank the following assets from most liquid to least liquid:,checking account deposits houses currency washing machines saving deposits common stock Q: What are the criteri

3、a of being Money?,III. Money has to meet the following criteria:,It must be easily standardized, making it simple to ascertain its value. It must be widely accepted. It must be divisible so that it is easy to “make change” It must be easy to carry. It must not deteriorate quickly.,IV. Evolution of t

4、he Payments System,A. The definition: It is the method of conducting transactions in the economy. The payments system has been evolving over centuries.,B. The evolution of It,Commodity money- Money made up of precious metals or another valuable commodity. Fiat money is paper currency decreed by gove

5、rnments as legal tender (meaning that legally it must be accepted as payment for debts) but not convertible into coins or precious metal. Checks are payable on demand that allows transactions to take place without the need to carry around large amounts of currency. E-money,Q: What are the each ones

6、disadvantages and advantages:,Disadvantages: Such as: It is very heavy to carry. It is hard to transport from one place to another. It is hard to divide. they are easily stolen,Its advantages:,reduces the transportation costs associated with the payments system and improves economic efficiency. Chec

7、ks are advantageous in that loss from theft is greatly provides convenient receipts for purchases.,Lets see some countries fiat money,V. Measuring Money,According to their liquidity, the authorities make a measurement of Money. M1 - the narrowest measure of money. These assets are clearly money beca

8、use they can be used directly as a medium of exchange. M1 = Currency +Travelers checks + Demand deposits + Other checkable deposits,M2 - M1 + other assets that have check-writing features that are extremely liquid because they can be turned into cash quickly at very little cost. M2 = M1+Small-denomi

9、nation time deposits + Savings deposits + money market deposits accounts,M3 -M2 +somewhat less liquid assets. M3 = M2+ Large-denomination time deposits + Money market mutual fund shares + Term repurchase agreements + Term Eurodollars,VI. Money and Monetary Policy,The importance of money Discussion:

10、Can you explain how important money is in an economy?,A. Money and Business Cycles,Business Cycles, it refers to the upward and downward movement of aggregate output produced in the economy. Aggregate output is total production of goods and services .,Getting to know Business Cycle,B. Money and Infl

11、ation,Inflation, a continual increase in the price level, when too much money chases too few goods on the market, affects individuals, businesses, and the government. Inflation rate, the rate of change of the price level, usually measured as a percentage change per year.,Aggregate price level: The a

12、verage price of goods and services in an economy or more simply, the price level. There is a positive association between inflation and the growth rate of the money supply.,C. Money and Interest Rates,An interest rate is the cost of borrowing or the price paid for the rental of funds (usually expres

13、sed as a percentage of the rental of $100 per year.) money plays an important role in interest-rate fluctuations. And Why?,Because: On a personal level, interest rates could affect consumers willingness to spend or save . On a more general level, interest rates could affect businesses investment dec

14、isions.,2. Monetary Policy,What is Monetary Policy? Monetary Policy-the management of money and interest rates, which is the main tool that a national government uses to influence its economy. It is usually administered by the central bank which is appointed by government.,Monetary Policy: Control m

15、oney supply - interest rates - reserve requirement Fiscal Policy: - Control taxes - Spending,3. The main goals of monetary policy,“macroeconomic stability”- low unemployment low inflation economic growth a balance of external payments,4. The instruments of the central bank,The 1st instrument: Open m

16、arket operations -central bank, directly as a buyer or a seller, buys or sells government bonds at financial markets in order to influence the economy.,The 2nd instrument: Reserve requirements -Central bank requires the commercial banks should keep a certain fraction of checkable deposits as require

17、d reserves.,The 3rd instrument: The discount Window - a “window” where commercial banks borrow funds from central banks. Central bank can raise the discount rate or refuse to let them borrow further-”close down the discount window”.,In a word,By affecting the money supply, that monetary policy can e

18、stablish ranges for inflation, unemployment, interest rates, and economic growth.,Key terms (I),Money / Wealth / check / Payment / currency barter economy / Checking account deposits / liquidity / transaction cost / a medium of exchange / paper currency double coincidence of wants/ fiat money a unit of account / a store of value payments system / commodity money,Key wo