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- Macroeconomics

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9 views

5-summary

- Macroeconomics

Uploaded by

demro channel
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Money

Medium of exchange
Barter is substitute of money (requires a double coincidence of wants)
It must be
Money (a) easily standardized
Has (b) widely accepted;
(c) divisible
three (d) easy to carry
functions: (e) not deteriorate quickly.
Unit of account --We measure the value of goods and services in terms of money
Store of value - Money is not unique as a store of value
To store wealth, we can use - any asset—whether money, stocks, bonds, land,
houses, art, or jewelry

Money consists of:


◎ Currency: ◎ Deposits at banks and other depository institutions:
- It is the notes and coins we use in transactions. the owners can use the deposit to make payments.
Official Measures of Money
M1(money) M2
consists of consists of
- currency - M1 plus time deposits,
- traveler’s checks saving deposits, money
- checking deposits market mutual funds, and
(current accounts) other deposits.
owned by
- individuals ◎Some saving deposits
- businesses. in M2 are not means of
payments—they are
called liquid assets

.
Are Debit Cards & Credit Cards considered Money?!
- Deposits Are Money but Checks and Debit Cards Are Not Money!
◎ A check or card swipe is not money, but the deposit on which it is linked is money.
- Credit Cards Are Not Money!
◎ A credit card enables the holder to obtain a loan, but it must be repaid with money.
A depository institution is a firm that takes deposits from households and firms and makes loans to other
households and firms.
Commercial Banks Credit Unions Money Market Mutual Funds
It is a firm that is licensed by the A financial institution that receives It is a fund operated by a financial institution
regulator or by a state agency to deposits from and makes loans to its that sells shares in the fund and holds assets
receive deposits and make loans. members. such as U.S. Treasury bills.
What Depository Institutions Do?
Earn income from service fees of cheque clearing, account management, credit cards, and internet banking
and most of their income from the funds they receive from depositors to make loans and buy securities that
earn a higher interest rate than that paid to depositors
- A bank puts the funds it receives from depositors and the funds it borrows into three types of assets:
Cash assets/ Reserves Securities Loans
-A bank must keep a percentage -Government Treasury bills, - Banks make loans to businesses to
of deposits as reserves, this Government bonds, and other finance the purchase of capital,
percentage is set by bonds such as mortgage-backed mortgage loans to finance the purchase
the Central Bank. securities. of homes, and personal loans to finance
consumer purchases. -Credit card
accounts are also bank loans.

The Federal Reserve System


A central bank is the public authority that regulates a nation’s depository institutions and controls the quantity of money

The central bank’s goals are


to keep inflation in maintain full moderate the business contribute toward achieving long-term
check employment cycle growth
the central bank of
USA EGYPT
(the Fed) (CBE)
The Fed’s Balance Sheet
◎ On the Fed’s balance sheet, the largest and most important asset is U.S. government securities, followed by mortgage-
backed securities.
◎ The most important liabilities are Federal Reserve notes in circulation and banks’ reserve deposits at
the Fed.
◎ The sum of Federal Reserve notes, coins, and depository institutions’ deposits at the Fed is the monetary base
The Conduct of Monetary Policy
(1) Open Market Operations
◎ An open market operation is the purchase or sale of government securities by the Fed from or to a
commercial bank or the public.
◎ When the Fed buys securities, it pays for them with newly created reserves held by the banks.
◎ When the Fed sells securities, they are paid for with reserves held by banks.
◎ So open market operations influence banks’ reserves.
(2) Last Resort Loans
◎ The Fed is the lender of last resort, which means the Fed stands ready to lend reserves to depository
institutions that are short of reserves.
(3) Required Reserve Ratio
◎ The Fed sets the required reserve ratio (10%), which is the minimum percentage of deposits that a
depository institution must hold as reserves.
◎ The Fed rarely changes the required reserve ratio.
◎ In Egypt, CBE’s requirement was 14% and in September 2022 it was increased to 18%.
How Banks Create Money?
Creating Deposits by Making Loans and so the new deposits created are new money.
-The quantity of deposits createrd is limited by three factors:
Monetary Base (MB = Currency + Reserves) Reserves Desired Currency Holding (DCH)
MB = Federal Reserve notes + coins + banks’ A bank’s total reserves People hold some fraction of
reserves at the Fed consists of notes and coins their money as currency. When
in its vault and its deposit the total quantity of money
at the Fed
increases, so does the quantity of
currency that people plan to hold.
Multiple Deposit Creation: A Simple Model
The Money Market
The Influences on Money Holding
(1) The Price Level
◎ Real money = nominal money/Price level
(2) The Nominal Interest Rate
(3) Real GDP
(4) Financial Innovation
The Demand for Money
MD is the relationship between the Q of real money demanded and the nominal interest rate
the interest rate directly proportional to the opportunity cost of holding money rises and
inversely proportional to the Q of real money demanded decreases
Shifts in the Demand for Money Curve
- As real GDP increases the demand for money increases and shifts the demand curve rightward. (vice versa)
- The influence of financial innovation on the demand for money curve is more complicated.
- It decreases the demand for currency and might increase the demand for some types of deposits and
decrease the demand for others.
- But in general, financial innovation generally decreases the demand for money.
Money Market Equilibrium
Money market equilibrium occurs Q money demanded = Q money supplied.

The Short-Run Effect of a Change in the Quantity of Money


Short-Run Equilibrium
When the Central Bank increases the money supply by $0.02 trillion, so what exactly happens in the short-run?
◎ In the short-run, an increase in the money supply from M1, to M2 pushes the interest rate down from r1 to r2 and the
economy moves to E2, a short-run equilibrium.
◎ Nominal interest rate falls, real interest rate falls too. Firms want to borrow more to invest in their businesses,
and households want to borrow more to invest in bigger homes or to buy more consumer goods.
◎ Aggregate demand > Aggregate Supply because the economy is already at full employment so there is a
general shortage of all kinds of goods and services leading the aggregate price level to rise.

Long-Run Equilibrium
When the Central Bank increases the money supply by $0.02 trillion, so what exactly happens in the long-run?

◎ In the long run, real GDP equals potential GDP, the money market, the loanable funds market, the goods market, and the
labour market are in long-run equilibrium—the economy is in long-run equilibrium.
◎ The real GDP and employment are determined by the demand for and supply of labour and the production function and
the real interest rate is determined by the demand for and supply of real loanable funds .
◎ The only variable that is free to respond to a change in the supply of money in the long run is the price level.
The price level adjusts to make the quantity of real money supplied equal to the quantity demanded.
Quantity Theory of Money
When the nominal quantity of money changes, in the long run the price level changes by a percentage equal to the
percentage change in the quantity of nominal money.
Velocity of Circulation
Velocity of circulation is the average number of times a dollar of money is used annually to buy the goods and
services that make up GDP.
V = (P x Y )/ M
where: V is Velocity of circulation, P is price level, Y is real GDP, M is money supply

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