Chapter 13: Macro Economy

Transcription

1 Economics for Managers by Paul Farnham Chapter 13: The Role of Money in the Macro Economy 13.1

2 Money and the U. S. Financial i System Money: financial assets that can easily be used to make market transactions and that serve as a medium of exchange and a store of value Barter system: when goods and services are exchanged directly without a common unit of account 13.2

3 Measures of the Money Supply Liquidity: ability to immediately make market transactions M1 is the money supply (includes most liquid components) Demand deposits: checkable deposits and a component of the M1 measure of the money supply 13.3

4 Commercial Banks Depository institution backed by the FDIC, which protects deposits up to $100, Fractional reserve system (rr): banks need only keep a fraction of their reserves Reserve requirement: required reserves divided id d by demand d deposits Money supply: currency plus demand deposits 13.4

5 Monetary Base and Money Supply Money Supply Currency Demand Deposits Money Multiplier li Currency Reserves Monetary Base 13.5

6 The Federal Reserve Acts as central bank of U.S. that implements monetary policy and regulates U.S. financial system 12 district banks and 25 branches Independent within the government 13.6

7 Open Market Operations Buying and selling of government securities in open market Influences amount of reserves held by commercial banks, which in turn influences federal funds rate Federal funds market: private market where banks borrow to meet reserve requirements 13.7

8 Open Market Operations Expansionary monetary policy: increases rate of Real GDP by increasing amount of bank reserves in system and lowering federal funds and other interest rates Other interest rates tend to fall along with federal funds rate 13.8

9 Contractionary Monetary Policy Fed decreases rate of growth of real GDP by increasing bank reserves and raising i federal funds and other interest t rates FOMC also engages in securities daily after analyzing economic conditions 13.9

10 Discount Rate Interest rate Fed charges banks that borrow reserves at Fed s discount window Indicates contractionary monetary policy Commercial banks have been reluctant to borrow at the discount window 13.10

11 Reserve Requirements Monetary Control Act of 1980: made all depository institutions subject to reserve requirements established by the Fed Raising reserve requirements has contractionary effect on economy Even small changes have major impact on reserve requirements 13.11

12 Managerial Rule of Thumb: Federal Reserve Policy Managers must Watch Fed policy statements and actions Decide how monetary policy will influence economic activity Be guided d by the actions of the Federal Open Market Committee regarding federal funds rates 13.12

13 Supply of Money Nominal money supply (M S ): money supply (M1) controlled by the Federal Reserve Real money supply: (M / P) nominal money supply divided by the price level (influences individuals behavior) An increase in the nominal money supply results in an increase in the real money supply, all else constant 13.13

14 Real Money Supply Function Figure 13.3 RLMS 1 RLMS 2 Increase in M S by Fed or decrease in price level (P) will cause real money supply function to shift from RLMS 1 to RLMS 2 0 (MS / P) 1 (M S / P) 2 M / P 13.14

15 Real Money Supply Function RLMS = M S /P RLMS = M S /P=f(r (r, M S, P) where RLMS = real money supply M S = nominal money supply P = the price level r = real linterest trate 13.15

16 Demand for Money Figure 13.4 A r 1 r 2 B C RLMD 1 0 (M / P) 1 (M / P) 2 (M / P) 3 RLMD 2 (M / P) 13.16

17 Demand for Money RLMD = M D / P = f (r, Y) where RLMD = real money demand M D = nominal money supply P = the price level r = real interest rate Y = level l of real income 13.17

18 Demand for Money Demand for money focuses on decisions individuals make regarding their assets Individuals hold money because it is liquid and enables them to conduct transactions Higher interest rates cause individuals to hold fewer assets Real demand depends on level of real income (Y) in economy 13.18

19 Change in the Real Money Supply Figure 13.5 RLMS 1 RLMS 2 A A r 1 r 2 B RLMD 0 (M / P) 1 (M / P) 2 (M / P) 13.19

20 Change in the Demand for Money Figure 13.6 r 2 RLMS B r 1 A A 0 RLMD 1 (Y 1 ) (M / P) RLMD 2 (Y 2 ) 13.20

21 Summary of Key Terms Barter system Commercial banks Contractionary monetary policy Demand deposits Discount rate and prime rate Expansionary monetary policy FDIC 13.21

22 Summary of Key Terms Federal funds market and federal funds rate FOMC The Fed/ Czech National Bank, etc. Fractional reserve system Liquidity Money 13.22

23 Summary of Key Terms Money supply Open market operations Pi Prime rate Reserve requirement 13.23