Download - Econ 2020, Topic 4
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MoneySpring 2013
Topic 4
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What is the alternative to money?
Barter
Inefficiency
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What is money?
Anything widely accepted as a medium of exchange
Liquidity
Is gold money?
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Functions of money
Medium of exchange
Unit of account
Store of value
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Types of money
Commodity
Convertible paper currency
Commodity backed money
Fiat money
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Measures of money
M1
M2
MZM
Why so many measures?
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Federal Reserve
Created 1913
12 regional banks
Quasi-governmental entity
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Functions of the Fed
Clearinghouse for transactions
Supervisor of bank operations
Controller of the money supply
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FOMC
Main entity for setting monetary policy for the US
Members
Board of Governors
Head of the NY Fed
4 other Fed presidents
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Money creation
100% reserve requirement
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Money creation
100% reserve requirement
10% reserve requirement
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Which is it?
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Tools of monetary policy
Required reserve ratio
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Tools of monetary policy
Required reserve ratio
Primary credit rate
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Tools of monetary policy
Required reserve ratio
Primary credit rate
Federal funds rate
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Tools of monetary policy
Required reserve ratio
Primary credit rate
Federal funds rate
Open market transactions
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Money multiplier
1 ÷ reserve ratio
At best an estimate
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Why care about money?
Connection to interest rates
Money market
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Why care about money?
Connection to interest rates
Connection to prices
Equation of exchange
M x V = P x Y
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Golden Rule
Milton Friedman
3 percent growth
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Why is it not that easy?
“Pushing on a string”
Loans may not be given
Hoarding
Velocity may change
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Velocity
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So why worry?
Costs of inflation
Shoeleather costs
Menu costs
Tax distortions
Redistribution of wealth
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So why worry?
Costs of inflation
Deflation is worse