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MONEY AND PRICE
Money market
Money - History

division of labor 
barter

„double coincidence of wants“

„universal equivalent“ = commodity money
paper money
time of golden standard


The classical quantity theory
of money
M*V = P*Q
MONETARY AGREGATES:
M1 = TRANSACTIONS MONEY
M2= BROAD MONEY
M3
L = „liquid assets“
D = credit
MONEY FUNCTIONS

medium of exchange

unit of account

store of value
Demand for Money

The transaction
demand

The asset demand
COST OF HOLDING MONEY

– the interest loss
because money is not
invested in alternative
assets
Motives for holding money
•
Transaction
•
Precautionary
•
Speculative
Factors affecting MD



change in real output (GDP),
change in price level,
.. Other changes in economic conditions
(transaction cost of converting near money
into money, change in bond prices..)
Interest rate
An increase in demand for money
i
MD0
O
Q0
MD1
Q1
M
fig 2.2
Money market

Money supply – little sensitive or completely
insensitive to interest rate
Determined by the central bank
PRICE
1) Price as a result of what has to be expend
on production of goods
2) Price as a reflection of utility rate of
production
1.
Assuming: average price level in economy is 1,5, real
GDP 240 mld. EUR, money supply 60 mld. EUR.
What’s the velocity of money like?
2.
Assuming, the V is constant. What will happen in
economy described in task nr.1 if the money supply
increases by 20 mld. EUR?
3.
Calculate the velocity of money, if the monetary base
consists of paper currency 110,2 mld., demand
deposits 321 mld., time deposits 504,8 mld and the
value of final production is 1205,5 mld.