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10
MONEY AND PRICES IN THE LONG
RUN
Chapter 29
The Monetary System
29.1 The Meaning of Money
• Money is the set of assets in an economy
that people regularly use to buy goods and
services from other people.
29.1.1 The Functions of Money
• Money has three functions in the economy:
– Medium of exchange
– Unit of account
– Store of value
29.1.1 The Functions of Money
• Medium of Exchange
– A medium of exchange is an item that
buyers give to sellers when they want to
purchase goods and services.
– A medium of exchange is anything that is
readily acceptable as payment.
29.1.1 The Functions of Money
• Unit of Account
– A unit of account is the yardstick people
use to post prices and record debts.
• Store of Value
– A store of value is an item that people
can use to transfer purchasing power
from the present to the future.
29.1.1 The Functions of Money
• Liquidity
– Liquidity is the ease with which an asset
can be converted into the economy’s
medium of exchange.
29.1.2 The Kinds of Money
• Commodity money takes the form of a
commodity with intrinsic value.
– Examples: Gold, silver, cigarettes.
• Fiat money is used as money because of
government decree.
– It does not have intrinsic value.
– Examples: Coins, currency, check deposits.
29.1.3 Money in the U.S. Economy
• Currency is the paper bills and coins in the
hands of the public.
• Demand deposits 活期存款 are balances in
bank accounts that depositors can access on
demand by writing a check.
Figure 1 Money in the U.S. Economy in 2001
Billions
of Dollars
M2
$5,455
• Savings deposits
• Small time deposits
• Money market
mutual funds
• A few minor categories
($4,276 billion)
M1
$1,179
0
• Demand deposits
• Traveler’
s checks
• Other checkable deposits
($599 billion)
• Currency
($580 billion)
• Everything in M1
($1,179 billion)
Appendix: MONEY STOCK MEASURES
• 1. M1 consists of (1) currency outside the U.S. Treasury,
Federal Reserve Banks, and the vaults of depository
institutions; (2) traveler's checks of nonbank issuers;
(3) demand deposits at commercial banks (excluding
those amounts held by depository institutions, the U.S.
government, and foreign banks and official institutions) less
cash items in the process of collection and Federal Reserve
float; and (4) other checkable deposits (OCDs), consisting
of negotiable order of withdrawal (NOW) and automatic
transfer service (ATS) accounts at depository institutions,
credit union share draft accounts, and demand deposits at
thrift institutions. Seasonally adjusted M1 is constructed
by summing currency, traveler's checks, demand deposits,
and OCDs, each seasonally adjusted separately.
Appendix: MONEY STOCK MEASURES
• 2. M2 consists of M1 plus (1) savings deposits
(including money market deposit accounts);
(2) small-denomination time deposits (time deposits
in amounts of less than $100,000), less individual
retirement account (IRA) and Keogh balances at
depository institutions; and (3) balances in retail
money market mutual funds, less IRA and Keogh
balances at money market mutual funds.
• Seasonally adjusted M2 is constructed by summing
savings deposits, small-denomination time deposits,
and retail money funds, each seasonally adjusted
separately, and adding this result to seasonally
adjusted M1. (http://www.federalreserve.gov/releases/h6/Current/)
CASE STUDY: Where Is All The
Currency?
• In 2001 there was about $580 billion of U.S.
currency outstanding.
– That is $2,734 in currency per adult.
• Who is holding all this currency?
– Currency held abroad
– Currency held by illegal entities
Table1: 金融机构人民币存款基准利率(单位:年利率％)
调整时间
定期
活期
3个月
6个月
1年
2年
3年
5年
1990.04.15
2.88
6.3
7.74
10.08
10.98
11.88
13.68
1990.08.21
2.16
4.32
6.48
8.64
9.36
10.08
11.52
1991.04.21
1.8
3.24
5.4
7.56
7.92
8.28
9
1993.05.15
2.16
4.86
7.2
9.18
9.9
10.8
12.06
1993.07.11
3.15
6.66
9
10.98
11.7
12.24
13.86
1996.05.01
2.97
4.86
7.2
9.18
9.9
10.8
12.06
1996.08.23
1.98
3.33
5.4
7.47
7.92
8.28
9
1997.10.23
1.71
2.88
4.14
5.67
5.94
6.21
6.66
1998.03.25
1.71
2.88
4.14
5.22
5.58
6.21
6.66
1998.07.01
1.44
2.79
3.96
4.77
4.86
4.95
5.22
1998.12.07
1.44
2.79
3.33
3.78
3.96
4.14
4.5
1999.06.10
0.99
1.98
2.16
2.25
2.43
2.7
2.88
2002.02.21
0.72
1.71
1.89
1.98
2.25
2.52
2.79
2004.10.29
0.72
1.71
2.07
2.25
2.7
3.24
3.6
2006.08.19
0.72
1.8
2.25
2.52
3.06
3.69
4.14
2007.03.18
0.72
1.98
2.43
2.79
3.33
3.96
4.41
2007.05.19
0.72
2.07
2.61
3.06
3.69
4.41
4.95
2007.07.21
0.81
2.34
2.88
3.33
3.96
4.68
5.22
2007.08.22
0.81
2.61
3.15
3.6
4.23
4.95
5.49
2007.09.15
0.81
2.88
3.42
3.87
4.5
5.22
5.76
4.68
5.4
5.85
2007.12.21
0.72
3.33
3.78
4.14
source: 中国人民银行http://www.pbc.gov.cn/detail.asp?col=462&ID=1902
Table2: 金 融 机 构 人 民 币 贷 款 基 准 利 率 (单 位 :年 利 率 ％ )
调整时间
6个月
1年
1—3年(含) 3—5年(含)
5年以上
1991.04.21
8.1
8.64
9
9.54
9.72
1993.05.15
8.82
9.36
10.8
12.06
12.24
1993.07.11
9
10.98
12.24
13.86
14.04
1995.01.01
9
10.98
12.96
14.58
14.76
1995.07.01
10.08
12.06
13.5
15.12
15.3
1996.05.01
9.72
10.98
13.14
14.94
15.12
1996.08.23
9.18
10.08
10.98
11.7
12.42
1997.10.23
7.65
8.64
9.36
9.9
10.53
1998.03.25
7.02
7.92
9
9.72
10.35
1998.07.01
6.57
6.93
7.11
7.65
8.01
1998.12.07
6.12
6.39
6.66
7.2
7.56
1999.06.10
5.58
5.85
5.94
6.03
6.21
2002.02.21
5.04
5.31
5.49
5.58
5.76
2004.10.29
5.22
5.58
5.76
5.85
6.12
2006.04.28
5.4
5.85
6.03
6.12
6.39
2006.08.19
5.58
6.12
6.3
6.48
6.84
2007.03.18
2007.05.19
5.67
5.85
6.39
6.57
6.57
6.75
6.75
6.93
7.11
7.2
2007.07.21
6.03
6.84
7.02
7.2
7.38
2007.07.21
6.03
6.84
7.02
7.2
7.38
2007.07.21
6.03
6.84
7.02
7.2
7.38
2007.08.22
6.21
7.02
7.2
7.38
7.56
2007.09.15
6.48
6.57
7.29
7.47
7.47
7.56
7.65
7.74
7.83
7.83
2007.12.21
Source: 中国人民银行http ://www.p bc.gov.cn/detail.asp ?col=462&ID=1903
Foreign
exchange
reserves
(100 million
USD)
Foreign
exchange
rates (Yuan
per US
Dollar) , (
Period
Average)
流通中现金
Currency in
circulation
(M0),
(Unit:100
Million
Yuan)
货币和准
货币
货币Money
Money(M1), & Quasi
(Unit:100
money(M2),
M illion
(Unit:100
Yuan)
M illion
Yuan)
2003.12
4032.51
8.277
19746.23
84118.81
219226.81
2004.12
6099.32
8.2765
21468.3
95970.82
253207.7
2005.1
6236.46
8.2765
24015.41
97079.03
257708.47
2005.12
8188.72
8.0759
24031.67
107278.57
298755.48
2006.1
8451.8
8.0668
29310.37
107250.68
303571.65
2006.12
10663.44
7.8238
27072.62
126028.05
345577.91
2007.1
11046.92
7.7898
27949.13
128484.06
351498.77
2007.12
15282.49
7.3676
30334.32
152519.17
403401.3
2008.1
15898.1
7.2478
36673.15
154872.59
417846.17
2008.3
16821.77
7.0752
30433.07
150867.47
423054.53
Source: 中国人民银行
(www.pbc.gov.cn/diaochatongji/tongjishuju/gofile.asp?file=2008S08.htm)
1985年
1987年
1988年
1998年3月21日
1999年11月21日
2003年9月21日
2004年4月25日
2006年7月5日
2006年8月15日
2006年11月15日
2007年1月15日
2007年2月25日
2007年4月16日
2007年5月15日
2007年6月5
统一为10%
从10%上调为12%
从12%上调为13%
从12%下调为8%
从8%下调为6%
从6%上调为7%
从7%上调为7.5%
从7.5%上调为8%
从8%上调为8.5%
从8.5%上调为9%
从9%上调为9.5%
从9.5％上调为10％
从10％上调为10.5％
从10.5％上调为11％
从11％上调为11.5％
存 款 准 备 金 率 上 调 次 日 股 市 的 表 现 与 市 场 自 身 当 时 的 走 势 密 切 相 关 (2007年1
月5日至7月30日，股市总体处于快速上涨区间，6次上调准备金率，次日股市都以
上涨笑脸相迎。从2007年9月6日到2008年3月18日，股市处于震荡调整期，其间6
次上调准备金率，次日股市则涨跌互现。最近三次上调，即2008年4月16日，5月
12日和6月7日，股市次日都报之以较大幅度的下跌。)
公布后首个交
次数
公布时间
调整前
调整后
幅度
易日沪指表现
15
2008-6-7(端午节)
16.50%
17.50%
1.00%
-7.73%
14
2008年5月12日
16%
16.50%
0.50%
-1.84%
13
2008年4月16日
15.50%
16%
0.50%
-2.09%
12
2008年3月18日
15%
15.50%
0.50%
上涨2.53%
11
2008年1月16日
14.50%
15%
0.50%
下跌2.63%
10
2007年12月8日
13.50%
14.50%
1%
上涨1.38%
9
2007年11月10日
13%
13.50%
0.50%
下跌2.40%
8
2007年10月13日
12.50%
13%
0.50%
上涨2.15%
7
2007年9月6日
12%
12.50%
0.50%
下跌2.16%
6
2007年7月30日
11.50%
12%
0.50%
上涨0.68%
5
2007年5月18日
11%
11.50%
0.50%
上涨1.04%
4
2007年4月29日
10.50%
11%
0.50%
上涨2.16%
3
2007年4月5日
10%
10.50%
0.50%
上涨0.43%
2
2007年2月16日
9.50%
10%
0.50%
上涨1.40%
1
2007年1月5日
9%
9.50%
0.50%
上涨0.94%
29.2 THE FEDERAL
RESERVE SYSTEM
• The Federal Reserve (Fed) serves as the
nation’s central bank.
– It is designed to oversee the banking
system.
– It regulates the quantity of money in the
economy.
29.2 THE FEDERAL RESERVE
SYSTEM
• The Fed was created in 1914 after a series of bank
failures in 1907 convinced Congress that the
United States needed a central bank to ensure the
health of the nation’s banking system.
29.2 THE FEDERAL RESERVE
SYSTEM
• The Structure of the Federal Reserve System:
– The primary elements in the Federal Reserve
System are:
• 1) The Board of Governors理事会
• 2) The Regional Federal Reserve Banks
• 3) The Federal Open Market Committee
Reserve Bank
Residents
New York
Board of Governors:
Approves discount
rates; sets reserve
requirements;
directs regulatory
operations
Chairman of the
Board of
Governors
6 governors of
the Board
Federal Open
Market Committee
(FOMC): Directs
open-market
operations;
advises on
discount rate
and reserve
requirements
Fig 26-2. The Major Players in Monetary
Policy
29.2.1 The Fed’s Organization
• The Fed is run by a Board of Governors, which
has seven members appointed by the president
and confirmed by the Senate.
• Among the seven members, the most important
is the chairman.
– The chairman directs the Fed staff, presides
over board meetings, and testifies about Fed
policy in front of Congressional Committees.
29.2.1 The Fed’s Organization
• The Board of Governors
– Seven members
– Appointed by the president
– Confirmed by the Senate
– Serve staggered 14-year terms so that one
comes vacant every two years.
– President appoints a member as chairman
to serve a four-year term.
29.2.1 The Fed’s Organization
• The Federal Reserve System is made up of
the Federal Reserve Board in Washington,
D.C., and twelve regional Federal Reserve
Banks.
29.2.1 The Fed’s Organization
• The Federal Reserve Banks
– Twelve district banks
– Nine directors
• Three appointed by the Board of Governors.
• Six are elected by the commercial banks in
the district.
– The directors appoint the district president,
which is approved by the Board of Governors.
The Federal Reserve System
29.2.1 The Fed’s Organization
• The Federal Reserve Banks
– The New York Fed implements some of
the Fed’s most important policy decisions.
29.2.1 The Fed’s Organization
• The Federal Open Market Committee (FOMC)
– Serves as the main policy-making organ of the
Federal Reserve System.
– Meets approximately every six weeks to
review the economy.
29.2.1 The Fed’s Organization
• The Federal Open Market Committee (FOMC) is
made up of the following voting members:
– The chairman and the other six members of the
Board of Governors.
– The president of the Federal Reserve Bank of
New York.
– The presidents of the other regional Federal
Reserve banks (four vote on a yearly rotating
basis).
29.2.1 The Fed’s Organization
• Monetary policy is conducted by the Federal
Open Market Committee.
– Monetary policy is the setting of the money
supply by policymakers in the central bank
– The money supply refers to the quantity of
money available in the economy.
29.2.2 The Federal Open Market Committee
• Three Primary Functions of the Fed
– Regulates banks to ensure they follow federal
laws intended to promote safe and sound
banking practices.
– Acts as a banker’s bank, making loans to
banks and as a lender of last resort.
– Conducts monetary policy by controlling the
money supply.
29.2.2 The Federal Open Market Committee
• Open-Market Operations
– The money supply is the quantity of money
available in the economy.
– The primary way in which the Fed changes the
money supply is through open-market operations.
• The Fed purchases and sells U.S. government
bonds.
29.2.2 The Federal Open Market Committee
• Open-Market Operations
– To increase the money supply, the Fed
buys government bonds from the public.
– To decrease the money supply, the Fed
sells government bonds to the public.
29.3 BANKS AND THE
MONEY SUPPLY
• Banks can influence the quantity of demand
deposits in the economy and the money
supply.
29.3 BANKS AND THE
MONEY SUPPLY
• Reserves are deposits that banks have
received but have not loaned out.
• In a fractional-reserve banking system,
banks hold a fraction of the money
deposited as reserves and lend out the rest.
29.3 BANKS AND THE
MONEY SUPPLY
• Reserve Ratio
– The reserve ratio is the fraction of
deposits that banks hold as reserves.
29.3.2 Money Creation with FractionalReserve Banking
– When a bank makes a loan from its reserves, the
money supply increases.
– The money supply is affected by the amount
deposited in banks and the amount that banks
loan.
• Deposits into a bank are recorded as both
assets and liabilities.
• The fraction of total deposits that a bank has
to keep as reserves is called the reserve ratio.
• Loans become an asset to the bank.
29.3.2 Money Creation with FractionalReserve Banking
• This T-Account shows
a bank
that… Bank
First
National
– accepts deposits,
Assets
– keeps a portion
as reserves,
Reserves
– and lends out
$10.00
the rest.
Loans
– It assumes a
$90.00
reserve ratio
of 10%.
Total Assets
$100.00
Liabilities
Deposits
$100.00
Total Liabilities
$100.00
29.3.2 Money Creation with FractionalReserve Banking
• When one bank loans money, that money is
generally deposited into another bank.
• This creates more deposits and more
reserves to be lent out.
• When a bank makes a loan from its reserves,
the money supply increases.
29.3.3 The Money Multiplier
• How much money is eventually created in
this economy?
• The money multiplier is the amount of
money the banking system generates with
each dollar of reserves.
29.3.3 The Money Multiplier
First National Bank
Assets
Liabilities
Reserves
$10.00
Deposits
$100.00
Loans
Second National Bank
Assets
Reserves
$9.00
Liabilities
Deposits
$90.00
Loans
$90.00
Total Assets
Total Liabilities
$100.00
$100.00
$81.00
Total Assets
$90.00
Total Liabilities
$90.00
Money Supply = $190.00!
29.3.3 The Money Multiplier
• The money multiplier is the reciprocal of the
reserve ratio:
M = 1/R
• With a reserve requirement, R = 20% or 1/5,
• The multiplier is 5.
• Thus, the higher the reserve ratio, the less of
each deposit banks loan out, and the smaller
the money multiplier.
货币供应模型和货币乘数
一般性的结论是，
联储对基础货币的控制优于它对储备的控制。
我们可以把基础货币分解为两个组成部分：一部分联储可以
完全控制；另一部分则不能完全控制。不能完全控制的部分
就是由联储贴现贷款创造的那部分基础货币。
将货币供应M与基础货币MB 联系起来很有意义：
M＝m  MB
变量m 为货币乘数，表示对于基础货币MB 的既定变动、货币
供应的变动。该乘数是基础货币转化为货币供应的倍数。
货币乘数大于1。
货币乘数反映出基础货币之外其他因素对货币供应的影响。
货币乘数的推导
（1）银行系统储备总额R等于法定准备金RR加上超额准备金ER：
R  RR  ER
法定准备金总量RR等于法定准备金率rd 乘以支票存款数量D：
RR  rd  D
（2）基础货币MB等于通货C加上准备金R：
MB  R  C （rd  D） ER  C
(a )该等式的一个特点是，由通货增加1美元所引起的MB增加1美元，
并不能支持存款的任何增加。这是因为通货的增加导致该等式右边
等额增长，但D未变。MB的通货部分并没有像准备金部分那样引起
存款多倍创造。换言之，基础货币增加的部分，如果使通货增加，
则不会发生乘数作用；如果使存款增加，则发生乘数作用。
(b)该等式的另一重要特点是，MB增加的1美元如果转化为超额准备金ER，
则不会使存款或通货有任何增加。这是因为当银行决定持有超额储备时，
它就不会增加贷款，所以这些超额准备金就不会产生存款创造。因此如果
联储向银行体系注入的储备被视作超额准备金，则对存款或通货都不会发生
任何影响，因而对货币供应也不产生任何影响。换言之，可以将超额准备金
视作准备金的无效组成部分，它们不被用来支持任何存款。
ER
C
MB  (rd  D)  ER  C  [rd  ( )  ( )]  D
D
D
1
支票存款　D 
 MB
rd  ( ER / D)  (C / D)
根据定义，
货币供应M 1等于通货加上支票存款，
C
M 1  D  C  [1  ( )]  D
D
1  (C / D)
M1 
 MB
rd  ( ER / D)  (C / D)
货币乘数m为，
1  (C / D)
m
rd  ( ER / D)  (C / D)
货币乘数是一个函数，随存款者决定的通货比率、联储决定的
法定储备率、银行决定的超额储备率的变动而变动。
M 2 货币乘数
M 2  D  C  T  MMF
其中，C  流通中的通货；D  支票存款；T  定期存款,
MMF  主要是货币市场互助基金份额和货币市场存款帐户，
加上隔日回购协议和隔日欧洲美元。
C
T
MMF
M 2  [1  ( )  ( )  (
)]  D
D
D
D
替代上述表达式中的D得
1  (C / D )  (T / D)  ( MMF / D)
M2 
 MB
rd  ( ER / D )  (C / D )
为对货币乘数有一感性认识，将现实的数字代入下列变量：
rd  0.10；C  4000亿美元；D＝8000亿美元；ER＝8亿美元；
M＝货币供应（M 1）＝C＋D＝12000亿美元；
C
ER
T＝24000亿美元；MMF ＝4000亿美元；　 0.5；  0.001
D
D
1  0.5
1  0.5  3  0.5
m1 
 2.5；　m2 
 8.32
0.10  0.5  0.001
0.10  0.5  0.001
因而M 2 货币乘数大于M 1货币乘数。
29.3.4 The Fed’s Tools of Monetary Control
• The Fed has three tools in its monetary
toolbox:
– Open-market operations
– Changing the reserve requirement
– Changing the discount rate
1. Open-market
Operations
2. Discount rate
3. Reserve
requirements
1.Money supply
2. Interest rate
3. Commercial
bank’s Reserves
1.Stable prices
2. Low
unemployment
3. Rapid Growth
in real GDP
instruments
Intermediate targets
Ultimate objectives
Fig29-3. While the Fed Ultimately Pursues Objectives like Stable
Prices, Its short-term Operations Focus on the intermediate targets
In determining monetary policy, the Fed directly manipulates the
instruments or policy variables under its control----open-market
operations, the discount rate, and reserve requirements. These help
determine bank reserves, the money supply, and interest rates----the
intermediate targets of monetary policy. Ultimately, monetary and fiscal
policies are partners in pursuing the major objectives of rapid growth,
low unemployment, and stable prices. (Samuelson,Economics,18th edition,
figure26-3,p534.)
29.3.4 The Fed’s Tools of Monetary Control
• Open-Market Operations
– The Fed conducts open-market operations when
it buys government bonds from or sells
government bonds to the public:
• When the Fed buys government bonds, the
money supply increases.
• The money supply decreases when the Fed
sells government bonds.
29.3.4 The Fed’s Tools of Monetary Control
• Reserve Requirements
– The Fed also influences the money supply
with reserve requirements.
– Reserve requirements are regulations on the
minimum amount of reserves that banks must
hold against deposits.
29.3.4 The Fed’s Tools of Monetary Control
• Changing the Reserve Requirement
– The reserve requirement is the amount (%) of a
bank’s total reserves that may not be loaned out.
• Increasing the reserve requirement decreases
the money supply.
• Decreasing the reserve requirement increases
the money supply.
29.3.4 The Fed’s Tools of Monetary Control
• Changing the Discount Rate
– The discount rate is the interest rate the Fed
charges banks for loans.
• Increasing the discount rate decreases the
money supply.
• Decreasing the discount rate increases the
money supply.
Appendix: The Effects of Money
on Output and Prices
B.1. The Monetary Transmission
Mechanism
Appendix: The Monetary
Transmission Mechanism
• For concreteness, assume that the Federal Reserve
is concerned about inflation and has decided to
slow down the economy. There are five steps in the
process:(Samuelson,Economics,18th edition, pp542-543.)
• 1.To start the process, the fed takes steps to
reduce bank reserves for loan. The Fed reduces
bank reserves primarily by selling government
securities in the open market. This open-market
operation changes the balance sheet of the banking
system by reducing total bank reserves.
2.Each dollar reduction in bank reserves produces
a multiple contraction in checking deposits,
thereby reducing the money supply. Since the
money supply equals currency plus checking
deposits, the reduction in checking deposits
reduces the money supply.
• 3.The reduction in the money supply increases
interest rates and tightens credit conditions. With
an unchanged demand for money, a reduced supply
of money will raise interest rates. In addition, the
amount of credit (loans and borrowing) available to
people will decline. Interest rates will rise for
mortgage borrowers and for businesses that want to
build factories, buy new equipment, or add to
inventories. Higher interest rates tend to reduce
asset prices (such as those stocks, bonds, and
houses) and therefore depress the values of
people's assets.
4. With higher interest rates and lower wealth, interestsensitive spending--especially investment- - tends to fall.
The combination of higher interest rates, tighter credit, and
lower wealth tends to reduce investment and consumption
spending. Businesses will scale down their investment plans,
as will state and local governments. For example, higher
interest rates may lead airlines to stretch out their purchases
of new aircraft. Similarly, consumers may decide to buy a
smaller house, or to renovate their existing one, when rising
mortgage interest rates increase monthly payments relative
to monthly income. And in an economy increasingly open to
international trader, higher interest rates may raise the
foreign exchange rate the dollar, depressing net exports.
Hence, tight money will raise interest rates and reduce
spending on interest-sensitive components of aggregate
demand.
• 5. Finally, the pressures of tight money, by reducing
aggregate demand, will reduce income, output, jobs, and
inflation. The aggregate supply-and-demand (or,
equivalently, the multiplier) analysis showed how such a
drop in vestment and other autonomous spending may
depress output and employment sharply. Furthermore, as
output and employment fall below the levels that would
otherwise occur, prices tend to rise less rapidly or even to
fall. Inflationary forces subside. If the Fed's diagnosis of
inflationary conditions was correct, the drop in output and
the rise in unemployment will help relieve inflationary
forces.
• We can summarize the step as follows:
• R down →MS down →i up →I,C,X down →AD down
• →Real GDP down and inflation down.
(c) Output Determined
Graphical Analysis of
Monetary Policy
GDP (per year)
Interest rate (percent per year)
Figure 26-7. Central Bank
Determines the Money Supply,
Changing Interest Rates and
Investment, Thereby Affecting GDP.
i
A"
S
100
200
I, S
i
SB
10
10
8
B"
3000
0
SA
S
GDP
3300
A
A'
8
6
B'
B
4
2
4
D
0
Money
(a) The Money Market
M
Di
2
0
100 200
Investment (per year)
I
(b) Demand for Investment
Appendix: The Effects of
Money on Output and Prices
B.2. THE MONEY MARKET
Interest rate
(percent per year)
10
MS
Appendix: Supply of
and Demand for Money
8
6
4
MD
2
0
M*
Money
M
Figure 26-5. The Money Market (Samuelson,Economics,18th edition, p543.)
The interaction of the demand for and supply of money determines the
interest rate. The Fed has a money target at M*. The public has a
downward-sloping money demand schedule. Here the money market is
in equilibrium with a nominal interest rate of 4 percent per year.
(b) Money-Demand Shift
i
10
S'
S
8
E'
6
4
E
N
D
2
0
M*'
M*
Money
M
Interest rate (percent per year)
Interest rate (percent per year)
(a) Monetary Tightening
i
10
8
S
E"
6
4
E
2
0
D'
D
M*
Money
M
Fig26-6. Changes in Monetary Policy or Prices Affect Interest Rates
In (a), the Federal Reserve contracts the money supply in response to fears of rising
prices. The lower money supply produces an excess demand for money, shown by the
gap NE. As the public adjusts its portfolio, interest rates rise to the new equilibrium at
E’. In (b), the demand for money increases as prices rise, other things held constant.
The higher demand for money drives up market interest rates until the quantity of
money demanded equals the money. (Samuelson, Economics, 18th edition, p544.)
• To summarize our findings about the money
market:
• the money market is affected by a combination of
(1)the public's desire to hold money (represented
by the demand-for-money DD curve )and (2)the
Fed's monetary policy (shown as a fixed money
supply ,SS). their interaction determines the
market interest rate. A restrictive monetary
policy shifts the SS curve to the left , raising
market interest rates. An increase in the nation
output or price level shifts the DD curve to the
right and raise interest rates .An expansion of the
money supply or a decline in money demand has
the opposite effects. (Samuelson, Economics, 18th, p545.)
(c) Output Determined
Graphical Analysis of
Monetary Policy
GDP (per year)
Interest rate (percent per year)
Figure 26-7. Central Bank
Determines the Money Supply,
Changing Interest Rates and
Investment, Thereby Affecting GDP.
i
A"
S
100
200
I, S
i
SB
10
10
8
B"
3000
0
SA
S
GDP
3300
A
A'
8
6
B'
B
4
2
4
D
0
Money
(a) The Money Market
M
Di
2
0
100 200
Investment (per year)
I
(b) Demand for Investment
• Figure 26-7. Central Bank Determines the Money Supply, Changing
Interest Rates and Investment, Thereby Affecting GDP
• When the Fed raises the money supply, from SA to
SB, interest rates fall as people increase their money
balances, moving down the money demand schedule
in (a).
• Lower interest rates reduce the cost of investment,
thus encouraging business purchases of plant and
equipment and consumer purchases of houses. The
economy moves down the demand-for-investment
schedule from A' to B' in (b).
• By the multiplier mechanism in (c), the higher
investment raises aggregate demand and GDP from
A" to B". (Samuelson, Economics,18th edition, P546.)
29.3.5 Problems in Controlling the Money
Supply
• The Fed’s control of the money supply is not
precise.
• The Fed must wrestle with two problems that
arise due to fractional-reserve banking.
– The Fed does not control the amount of money
that households choose to hold as deposits in
banks.
– The Fed does not control the amount of money
that bankers choose to lend.
 中国住房贷款的两种还款方式的计算：
1、等额本息贷款计算公式：
每月还款金额(简称每月本息)
贷款本金  月利率  1  月利率 
还款月数

1  月利率
还款月数
1
.
2.　等额本金贷款计算公式：
每月还款金额(简称每月本息)
 贷款本金 

  本金  已归还本金累计额  月利率.
 还款月数 
Summary
• The term money refers to assets that people
regularly use to buy goods and services.
• Money serves three functions in an economy: as a
medium of exchange, a unit of account, and a
store of value.
• Commodity money is money that has intrinsic
value.
• Fiat money is money without intrinsic value.
Summary
• The Federal Reserve, the central bank of the
United States, regulates the U.S. monetary
system.
• It controls the money supply through openmarket operations or by changing reserve
requirements or the discount rate.
Summary
• When banks loan out their deposits, they increase
the quantity of money in the economy.
• Because the Fed cannot control the amount
bankers choose to lend or the amount households
choose to deposit in banks, the Fed’s control of
the money supply is imperfect.
Problems and Applications
Mankiw-chapter29-p643.:Problem
1. If the Fed wants to increase the money supply
with open market operations, what does it so?
2. Why don’t banks hold 100 percent reserves? How
is the amount of reserves banks hold related to the
amount of money the banking system creates?
3. What is the discount rate? What happens to the
money supply when the Fed raises the discount
rate?
4. What are reserve requirements?What happens to
the money supply when the Fed raises reserve
requirements?
5. Why can’t the Fed control the money supply
perfectly? (Mankiw-chapter 29, pp640-641.)
Mankiw-chapter29-p643.:Problem
1. What is money multiplier? (Mankiw-chapter 29, p6371.)
2. The Central Bank’s tools of monetary control?
(Mankiw-chapter 29, pp640-641.)
3. Describe three functions that money has in the
economy? What distinguishes money from other
assets in the economy?
4. What is commodity money?What is fiat money?
Which kind do we use?
5. What are demand deposits, and why should they
be included in the stock of money?
Problems and Applications
(Mankiw Chapter 32-p730) 1.Explain how each of the
a.
b.
c.
d.
following developments would affect the supply of
money, the demand for money, and the interest rate.
Illustrate your answers with diagrams.
A wave of optimism boosts business investment.
The Central Bank reduces reserve requirements.
An increase in oil prices shifts the short-run
aggregate-supply curve upward.
Households decide to hold more money to use for
holiday shopping.
利
率
r2
P
MS
P2
AS'
AS
Md'
P1
r1
Md
AD
Q
货币量
(c) An increase in oil prices shifts the short-run aggregatesupply curve upward. High price increase the demand for
money and increase interest rate.
2. Suppose banks install automatic
teller machines on every block and, by making cash
readily avaibable, reduce the amount of money people
want on hold.
a. Assume the Fed does not change the money supply.
According to the theory of liquidity preference, what
happens to the interest rate? What happens to aggregate
demand?
b. If the Fed wants to stabilize aggregate demand, how
should it respond?
(Mankiw Chapter 32 -p731.)
3.Consider two policies----a tax cut that will last for only
one year, and a tax cut that is expected to be permanent.
Which policy will stimulate greater spending by
consumers? Which policy will have the greater impact on
aggregate demand? Explain.
4. The interest rate in the United
States fell sharply during 1991. Many observers believed
this decline showed that monetary policy was quite
expantionary during the year. Could this conclusion be
incorrect? (Hint:The United States hit the trough of a
recession in 1991.)
(Mankiw Chapter 32 -p731.)
5. In the early 1980s, new legislation allowed banks to
pay interest on checking deposits, which they could not
do previously.
a. If we define money to include checking deposits, what
effect did this legislation have on money de- mand?
Explain.
b. If the Federal Reserve had maintained a constant
money supply in the face of this change, what would
have happened to the interest rate? What would have
happen to aggregate demand and aggregate output?
C. If the Federal Reserve had maintained a constant
market interest rate (the interest rate on nonmonetary
assets) in the face of this change, what change in the
money supply would have been necessary? What would
have happened to aggregate demand and aggregate
output?
6 . This chapter explains
expansionary monetary policy reduces the interest
and thus stimulates demand for consumption
investment goods. Explain how such policy
stimulates the demand for net exports.
(Mankiw Chapter 32 -p731.)
that
rate
and
also
7. Suppose economists observe that an increase in
government spending of $10 billion raises the total
demand for goods and services by $30 billion.
a. If these economists ignore the possibility of crowding
out, what would they estimate the marginal propensity
to consume (MPC) to be?
b. Now suppose the economists allow for crowding out.
Would their new estimate of the MPC be larger or
smaller than their initial one?
8. Suppose the government reduces
taxes by $20 billion, that there is no crowding out, and
that the marginal propensity to consume is 3/4.
a. What is the initial effect of the tax reduction on
aggregate demand?
b. What additional effects follow this initial effect? What
is the total effect of the tax cut on aggregate demand?
c. How does the total effect of this $20 billion tax cut
compare to the total effect of a $20 billion increase in
government purchase? Why?
(Mankiw-p731, Chapter 32)
9. Suppose consumers suddenly become more optimistic
about their future incomes and decide to purchase $30
billion of additional goods and services. Will this
change have a “multiplied” effect on total output?
Explain.
10. Suppose government spending
increases.Would the effect on aggregate demand be
larger if the Federal Reserve took no action in response,
or if the Fed were committed to maintaining a fixed
interest rate? Explain.
(Mankiw Chapter 32 -p731.)
11. In which of the following circumstances is
expansionary fiscal policy more likely to lead to a shortrun increase in investment? Explain.
a. when the investment accelerator is large or when it is
small?
b. when the interest sensitivity of investment is large, or
when it is small.
12. Assume the economy is in a
recession. Explain how each of the following policies
would affect consumption and investment. In each case,
indicate any direct effects, any effects resulting from
changes in total output, any effects resulting from
changes in the interest rate, and the overall effect. If
there are conflicting effects making the answer
ambiguous, say so.
a. an increase in government spending
b. a reduction in taxes
c. an expansion of the money supply
(Mankiw Chapter 32 -p731.)
13. For various reasons, fiscal policy
changes automatically when output and employment
fluctuate.
a. Explain why tax revenue changes when the economy
goes into a recession.
b. Explain why government spending changes when the
economy goes into a recession.
c. If the government were to operate under a strict
balanced-budget rule, what would it have to do in a
recession? Would that make the recession more or less
severe?
(Mankiw Chapter 32 -p731.)
14. In response to an increase in the
money supply, would
the following things be smaller, larger, or no different in
the long run than in the short run?
a. Consumer expenditures
b. The price level
c. The interest rate
d. Aggregate output
(Mankiw Chapter 32 -p731.)