© 2007 thomson south-western. the goals of chapter 29 to examine the role of money in the economy....


The Goals of chapter 29The Goals of chapter 29• To examine the role of money in the economy.• To provide the background for the following

analysis: -- the long-run effects of changes in the

quantity of money (Inflation is a monetary phenomenon.)

-- the short-run effects of changes in the quantity of money on unemployment rate and economic growth rate.


THE MEANING OF MONEYTHE MEANING OF MONEY•Money(貨幣 ) is the set of assets in an economy that people regularly use to buy goods and services from other people. That is, goods and services buy money, and money buys goods and services in monetary economy.•Imagine that there was no item in the economy widely accepted in exchange for goods and service. People would have to rely on barter exchanges to obtain the things they need. That is, good and service buy goods and service in the barter economy.


The Functions of MoneyThe Functions of Money• Money has three functions in the economy:

– Medium of exchange (交易媒介 )– Unit of account (計價單位 )– Store of value (價值儲藏 )


The Functions of MoneyThe 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.


The Functions of MoneyThe 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.


The Functions of MoneyThe Functions of Money• Liquidity (流動性 )is the ease with which an

asset can be converted into the economy’s medium of exchange.


The Kinds of MoneyThe Kinds of Money• Commodity money (商品貨幣 )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.– The acceptance depends as much on expectations

and social convention as on government decree.


The Kinds of MoneyThe Kinds of Money• Even through fiat money has no intrinsic

value, when one person decides to hold fiat money, she is confident that, in the future, another person will accept the money, in exchange for something that she does value. That is, the value of fiat money is determined by the confidence.


Money in the U.S. EconomyMoney in the U.S. Economy• The quantity of money circulating in the

economy, called the money stock(貨幣存量 ), has a powerful influence on economic activities.

• Currency (現金 )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 or using ATM.


台灣貨幣定義台灣貨幣定義• M1A M1A=通貨發行淨額 + 支票存額 + 活期存款• M1B (1979.12.31後始有 ) M1B=M1A+活期儲蓄存款• M2 M2=M1B+定期存款 + 定期儲蓄存款 + 外幣存款


Two Measures of the Money Stock forTwo Measures of the Money Stock for the U.S. Economythe U.S. EconomyBillions

of Dollars

• Currency($699 billion)

• Demand deposits• Traveler’s checks• Other checkable deposits ($664 billion)

• Everything in M1($1,363 billion)

• Savings deposits• Small time deposits• Money market mutual funds• A few minor categories ($5,035 billion)

0

M1$1,363

M2$6,398


台灣貨幣存量台灣貨幣存量 :1980-2006:1980-2006

0

500000

1000000

1500000

2000000

2500000

3000000

3500000

1980M01 1983M03 1986M05 1989M07 1992M09 1995M11 1999M01 2002M03 2005M05 2008M07

M1A

M1A台灣


台灣貨幣存量台灣貨幣存量 :1980-2006:1980-2006

0

1000000

2000000

3000000

4000000

5000000

6000000

7000000

8000000

9000000

1980M01 1983M04 1986M07 1989M10 1993M01 1996M04 1999M07 2002M10 2006M01

M1B

M1B台灣


台灣貨幣存量台灣貨幣存量 :1980-2006:1980-2006

0

5000000

10000000

15000000

20000000

25000000

30000000

1980M011983M02 1986M031989M04 1992M051995M06 1998M072001M08 2004M092007M10

M2

M2台灣


Where Is All The Currency?Where Is All The Currency?

• In 2004 there was $699 billion of U.S. currency outstanding.– That is $3,134 in currency per adult.

• Who is holding all this currency?

No one knows for sure, but there are two plausible explanations:– Currency held abroad– Currency held by illegal entities


THE FEDERAL RESERVE SYSTEMTHE FEDERAL RESERVE SYSTEM

• Whenever an economy relies on a system of fiat money, some agency must be responsible for regulating the system.

• The Federal Reserve (Fed) serves as the central bank in U.S.A.– It is designed to oversee the banking system.– It regulates the quantity of money in the economy.



• The Fed was created in 1913 after a series of bank failures convinced Congress that the United States needed a central bank to ensure the health of the nation’s banking system.



• The primary elements in the Federal Reserve System are:– The Board of Governors– The 12 Regional Federal Reserve Banks– The Federal Open Market Committee


The FedThe Fed’’s Organizations 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 of Board of Governors. – The chairman directs the Fed staff, presides over

board meetings, and testifies about Fed policy in front of Congressional Committees.



• The Board of Governors– 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.



• The Federal Reserve Banks– 12 district banks– Nine directors in each regional FRB.

• 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 New York Fed implements some of the Fed’s most important policy decisions.


The Federal Reserve SystemThe Federal Reserve System


The FedThe Fed’’s Organizations Organization• 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.


The Federal Open Market Committee The Federal Open Market Committee • It serves as the main policy-making organ of

the Federal Reserve System.

• It meets approximately every six weeks to review the economy.


The Federal Open Market Committee The Federal Open Market Committee • The Federal Open Market Committee (聯邦公開市場操作委員會， FOMC) is made up of the following voting members:– The chairman of Fed 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).


The Federal Open Market Committee The Federal Open Market Committee • Monetary policy is conducted by the Federal

Open Market Committee.– The money supply refers to the quantity of money

circulating in the economy.– Monetary policy is the setting of the money supply

by policymakers in the central bank.


The Federal Open Market CommitteeThe 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.


The Federal Open Market CommitteeThe Federal Open Market Committee• The power of central bank rests on the two

principles: prices rise when central bank prints too much money and society faces a short-run trade-off between inflation and unemployment.

• 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.


我國央行經營目標我國央行經營目標

•促進金融穩定

•健全銀行業務

•維護對內及對外幣值之穩定

•於上列目標範圍內，協助經濟發展


我國央行決策機構我國央行決策機構•央行設理事會，置理事 11人至 15人，其中央行總裁、財政部長及經濟部長為當然理事，並為常務理事外，理事中應有實際經營農業、工商業、銀行業至少各 1 人。


我國央行理事會的職權我國央行理事會的職權• 有關貨幣、信用及外匯政策事項之審議

• 央行資本額調整之審議

• 央行業務計畫之核定

• 央行預算、決算之審議

• 央行重要章則之審議及核定

• 央行各分行設立及撤銷之審議

• 央行各局、處、會正副主管及分行經理任免之核定


BANKS AND THE MONEY SUPPLYBANKS AND THE MONEY SUPPLY

• Banks can influence the quantity of demand deposits in the economy and the money supply.



• Reserves (準備 )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 (部分準備制銀行體系 ) as reserves and lend out the rest.



• The reserve ratio(準備率，以 R表示 ) is the fraction of deposits that banks hold as reserves.


Money Creation with Fractional-Reserve Money Creation with Fractional-Reserve BankingBanking• 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 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.


Banking Money Creation with Fractional-Banking Money Creation with Fractional-Reserve BankingReserve Banking

• This T-Account shows a bank that…– accepts deposits,– keeps a portion

as reserves, – and lends out

the rest.

• It assumes a reserve ratio (R)of 10%.

Assets Liabilities

First National Bank

Reserves$10.00

Loans$90.00

Deposits$100.00

Total Assets $100.00

Total Liabilities$100.00


Money Creation with Fractional-Reserve Money Creation with Fractional-Reserve BankingBanking• Assume that when one bank loans out 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.


The Money MultiplierThe Money Multiplier• How much money is eventually created by the

new deposit in this economy?

• The money multiplier (貨幣乘數 ) is the amount of money the banking system generates with each dollar of reserves.


The Money Multiplier The Money Multiplier

Increase in the Money Supply = $190.00!

Assets Liabilities

First National Bank

Reserves$10.00

Loans$90.00

Deposits$100.00

Total Assets$100.00


Assets Liabilities

Second National Bank

Reserves$9.00

Loans$81.00

Deposits$90.00

Total Assets$90.00



The Money MultiplierThe Money Multiplier

Original deposit = $100.00

• 2nd Natl. Deposit = 90.00 (=.9 x $100.00)

• 3rd Natl. Deposit = 81.00 (=.9 x $ 90.00)

• 4th Natl. Deposit = 72.90 (=.9 x $ 81.00)

• … and on until there are just pennies left to lend!

• Total money created by this $100.00 deposit is $1000.00. (= 1/.1 x $100.00)


The Money MultiplierThe Money Multiplier

• The money multiplier is the reciprocal of the reserve ratio (R):

M = 1/R

• Example:– With a reserve requirement, R = 20% or .2:– The money multiplier is 1/.2 = 5.


The FedThe Fed’’s Tools of Monetary Controls Tools of Monetary Control

• The Fed has three tools in its monetary toolbox:– Open-market operations (公開市場操作 )– Changing the reserve requirement (調整準備率 )– Changing the discount rate (調整貼現率 )


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 sells government bonds, the money supply decreases.

• When the Fed buys government bonds, the money supply increases.


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.



• 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.



• 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.


Problems in Controlling the Money SupplyProblems 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.


央行獨立性指標之編製央行獨立性指標之編製• 政治獨立性 (political independence) 係指行政部門與央行之間從屬關係，任免央行理事主席 ( 或總裁 ) 的程序，財經首長在央行決策過程中所扮演的角色以及行政部門和央行兩方官員互動方面以及接觸頻繁程度。此外，衡量央行政治性獨立程度時，還著重以下因素 : 央行理事、理事主席或總裁的任期，央行所制定的貨幣政策或其他重大決策是否須由行政部門事先核定方可執行，以及央行的法定經營目標。


央行獨立性指標之編製央行獨立性指標之編製• 經濟獨立性 (economic independence) 係指執行貨幣政策時央行的選擇政策工具時是否受到行政部門所加諸的外在限制。在實際編製時，經濟上獨立程度是指央行是否必須直接承購政府公債，央行是否須對政府短期融通或臨時墊借。


Index of central bank independence CBI Turnover Average Standard Error Per Capita Real (LVAU) Rate Inflation Inflation GNP Growth Ratecountry (1973-88) (1973-88) (1973-87) Developed CountriesSwitzerland 0.68 0.13 3.1 2.1 1.4 Germany 0.66 0.10 3.4 2.0 1.8 United States 0.51 0.13 6.4 3.3 1.6Denmark 0.47 0.05 8.6 3.3 1.1Canada 0.46 0.10 7.2 2.8 2.8Netherlands 0.42 0.05 4.3 3.2 1.1

United Kingdom 0.31 0.10 6.7 4.8 2.0Australia 0.28 n.a. 9.5 2.7 1.4France 0.27 0.15 8.2 3.5 1.5Sweden 0.27 0.15 8.3 2.8 1.5New Zealand 0.27 0.15 12.2 3.2 0.7Italy 0.22 0.08 12.5 5.4 2.9Spain 0.21 0.20 12.4 4.7 1.2Belgium 0.19 0.13 6.0 3.4 1.5Japan 0.16 0.20 4.5 4.1 2.6Norway 0.14 0.08 8.2 2.4 3.0


Index of central bank independenceIndex of central bank independence CBI Turnover Average Standard Error Per Capita Real (LVAU) Rate Inflation Inflation GNP Growth Rate

country (1973-88) (1973-88) (1973-87)

Developing CountriesChile 0.49 0.45 51.8 59.1 0.7

Argentina 0.44 0.93 356.7 253.5 -0.5 Venzuela 0.37 0.30 12.7 7.5 -0.3Mexico 0.36 0.15 50.2 39.3 1.2Taiwan 0.34 0.23 7.2 9.9 6.5Malausia 0.34 0.13 5.1 4.4 3.7South Korea 0.32 0.43 10.9 9.3 7.2Singapore 0.27 0.37 5.4 7.9 6.1Brazil 0.26 n.a. 273.3 203.9 2.4Thailand 0.26 0.20 8.0 6.9 4.9


A near perfect negative correlation A near perfect negative correlation between inflation and central bank between inflation and central bank independenceindependence


A strong negative correlation between A strong negative correlation between inflation variability and central bank inflation variability and central bank independenceindependence


No clear relation between GNP growth No clear relation between GNP growth and central bank independence


No clear relation between the variability of No clear relation between the variability of economic growth and central bank independenceeconomic growth and central bank independence


No clear relation between per capita economic No clear relation between per capita economic growth and central bank independencegrowth and central bank independence


No clear relation between the variability of per No clear relation between the variability of per capita economic growth and central bank capita economic growth and central bank independenceindependence


Low correlation between unemployment Low correlation between unemployment rate and central bank independencerate and central bank independence


Low correlation between the variability of Low correlation between the variability of unemployment rate and central bank independenceunemployment rate and central bank independence


No clear relation between real interest No clear relation between real interest rate and central bank independencerate and central bank independence


Low correlation between the variability of real Low correlation between the variability of real interest rate and central bank independenceinterest rate and central bank independence


• 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.

SummarySummary


• The Federal Reserve, the central bank of the United States, regulates the U.S. monetary system.

• It controls the money supply through open-market operations or by changing reserve requirements or the discount rate.

SummarySummary


• 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.

SummarySummary

© 2007 thomson south-western. the goals of chapter 29 to examine the role of money in the economy....

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