econ 2020, topic 4

MoneySpring 2013

Topic 4

What is the alternative to money?

Barter

Inefficiency

What is money?

Anything widely accepted as a medium of exchange

Liquidity

Is gold money?

Functions of money

Medium of exchange

Unit of account

Store of value

Types of money

Commodity

Convertible paper currency

Commodity backed money

Fiat money

Measures of money

M1

M2

MZM

Why so many measures?

Federal Reserve

Created 1913

12 regional banks

Quasi-governmental entity

Functions of the Fed

Clearinghouse for transactions

Supervisor of bank operations

Controller of the money supply

FOMC

Main entity for setting monetary policy for the US

Members

Board of Governors

Head of the NY Fed

4 other Fed presidents

Money creation

100% reserve requirement

Money creation

100% reserve requirement

10% reserve requirement

Which is it?

Tools of monetary policy

Required reserve ratio

Tools of monetary policy

Required reserve ratio

Primary credit rate

Tools of monetary policy

Required reserve ratio

Primary credit rate

Federal funds rate

Tools of monetary policy

Required reserve ratio

Primary credit rate

Federal funds rate

Open market transactions

Money multiplier

1 ÷ reserve ratio

At best an estimate

Why care about money?

Connection to interest rates

Money market

Why care about money?

Connection to interest rates

Connection to prices

Equation of exchange

M x V = P x Y

Golden Rule

Milton Friedman

3 percent growth

Why is it not that easy?

“Pushing on a string”

Loans may not be given

Hoarding

Velocity may change

Velocity

So why worry?

Costs of inflation

Shoeleather costs

Menu costs

Tax distortions

Redistribution of wealth

So why worry?

Costs of inflation

Deflation is worse