Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
MONEY • Definition of money – the part of wealth used to facilitate transactions • Note that in economics, money has a different meaning than expressions like: • • • • • “She makes a lot of money” “We’re cash. We’re cash. We’re money” “We’re cash. We’re cash. We’re money” “We’re cash. We’re cash. We’re money” “We’re cash. We’re cash. We’re money” • Consider some examples of money Stone money of Yap Island Ancient Chinese bronze money A100 billion mark note!! German Reichsbank, 1923 Most of money today consists of deposits at banks • Money supply = currency + deposits • M1 = currency plus checking deposits • M2 = M1 plus time deposits, savings deposits • difficult to determine which is the best measure of money Three functions of money • medium of exchange • store of value • unit of account General principle of monetary economics • A higher rate of money growth ultimately causes higher inflation, ceteris paribus – check intuition with case of commodity money Quantity equation of money • MV = PY • where M = money supply, P = price level, Y = real GDP, and V = velocity = PY/M • growth rate form of quantity equation • money growth + velocity growth = inflation + real GDP growth – examples 4 + .5 = 2 + 2.5 – Change 8 + .5 = 6 + 2.5 What is the empirical evidence? Does the quantity equation of money work? • Very well for big changes of over long run – – – – – The German hyperinflation,1923 (see graph) American revolutionary war Great Inflation of the 1970s (see graph) Russia, Argentina and Brazil Take a careful look at the G-7 graph • Less reliable in the short run – Difficult to measure money – Changes in M will affect Y Inflation in Germany, 1923 24_07 INFLATION RATE (PERCENT PER WEEK) 300 250 200 150 100 50 0 -50 Jan 6 Mar 7 May 7 Jul 7 Sep 7 Nov 7 24_06 Great Disinflation PRICE INDEX 1,000 Deflation after Civil War Fed created Great Depression Great Inflation 100 War of 1812 WWI 10 1800 1820 1840 1860 1880 1900 1920 WWII 1940 1960 1980 2000 Money growth and inflation 1973-1991 24_05 MONEY GROWTH (PERCENT PER YEAR) 18 16 U.K. 14 Italy 12 10 France Germany 8 Canada 6 United States 4 Japan 2 0 2 4 6 8 10 12 14 INFLATION (PERCENT PER YEAR) Long run versus short run effect of changes in money growth • Inflation does not usually increase right away – takes more than a year • In the meantime, other things are affected – employment, production • Makes money a difficult public policy issue, – money has long been central in political debates, as the following video nicely illustrates When he gets to Washington how the Democrats will run. For Republicans McKinley leads the way. What a glory that will be. We’ll regain prosperity, when McKinley and protection win the day We will answer their demands for a gold standard by saying to them: You shall not press down upon the brow of labor this crown of thorns. You shall not crucify mankind on a cross of gold. Sound the good old bugle with the bimetallic ring. Silver free from sea to sea with lusty voices sing. Our banner with its silver stars, the waving breezes fling. Marching with Bryan to victory. Lessons from this piece of American history • An economic issue became a great political issue to run on • Increasing money growth by coining silver would be more inflationary than the gold standard--and people knew it! • Increase in inflation was attractive to some Democrats (debtors versus creditors) • Several years later legislation was passed to establish a central bank in the United States The Central Bank • The agency of government given responsibility of controlling the money supply--we will see how next time. • In the United States, the central bank is the Federal Reserve System: – Simply called the Fed – Has a great degree of independence • Let’s check it out on the web 24_03 Board of Governors • Seven governors appointed by the president and confirmed by the Senate • One governor appointed to be chair • A staff of professional economists and statisticians District Federal Reserve Banks • Banks located in 12 districts throughout the country • Each district bank headed by a president chosen by commercial bankers and others in the district but approved by the Board of Governors Federal Open Market Committee (FOMC) • Makes decisions about the money supply and the federal funds interest rate • Consists of the Board of Governors and district bank presidents (only five presidents vote at a time) • Meets about eight times per year in Washington plus telephone conferences when needed 24_02 32-3 1 9 Minneapolis 2 7 New York 3 12 Chicago San Francisco Cleveland 10 Kansas City 4 Richmond St. Louis 5 8 Dallas 11 Boston Atlanta 6 Philadelphia Federal Reserve Board, Washington, D.C. END OF LECTURE