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Macroeconomics: Post Graduate Programme Debojyoti Mazumder

This document provides an overview of money markets and monetary concepts. It defines money as assets used for transactions and discusses different types of money like fiat and commodity money. Money serves as a store of value, unit of account, and medium of exchange. The document then covers economists' perspectives on money including the demand and supply of money. It defines various money aggregates like M1, M2, and M3. Commercial banks and the money multiplier are also discussed. The document concludes by outlining the three instruments central banks use to moderate money supply: open market operations, reserve requirements, and interest rates.

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40 views

Macroeconomics: Post Graduate Programme Debojyoti Mazumder

This document provides an overview of money markets and monetary concepts. It defines money as assets used for transactions and discusses different types of money like fiat and commodity money. Money serves as a store of value, unit of account, and medium of exchange. The document then covers economists' perspectives on money including the demand and supply of money. It defines various money aggregates like M1, M2, and M3. Commercial banks and the money multiplier are also discussed. The document concludes by outlining the three instruments central banks use to moderate money supply: open market operations, reserve requirements, and interest rates.

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MACROECONOMICS

POST GRADUATE PROGRAMME


DEBOJYOTI MAZUMDER
MODULE 1
MONEY MARKET
MONEY MARKET

 What is Money?

Money is the stock of assets that can be readily used to make transactions.

 Different types of money:


 Fiat money: Money that has no intrinsic value.
 Commodity money: A commodity which has its intrinsic value, is also used as
money.
MONEY MARKET

 What money does?


 Store of value.
 Unit of account.
 Medium of exchange.

 Why fiat money is more useful?


MONEY MARKET
MONEY MARKET

 Economists way of looking at money:

 Demand for money

 Supply of Money

 Real vs Nominal: Money demand and Money Supply


MONEY MARKET

 Demand for money: an example

 Quantity theory of money


𝐌∗𝐕=𝐏∗𝐘

 Transaction theories of money (Baumol-Tobin Model)

 As income increases, money demand increases and as interest rate increases money demand
falls.
MONEY MARKET

 Supply of money
Central bank mints currency.
Definitions:
Symbol Asset Includes
C Currency
M1 C + Demand deposit, checkable deposits (like
travellers check etc)
M2 M1+Mutual fund balances, saving deposits, small term
deposit
M3 M2+ large term deposits
MONEY MARKET

 More ‘handy’ definitions:

 Money stock : Conventionally M1 or/and M2 are considered as the money stock of


the economy.

 High Power Money (or Monetary base): Currency in circulation and banks’
deposits at the central bank.
MONEY MARKET

 Commercial Banks and Money Supply

 Currency
 Deposit
 Lending
MONEY MARKET

 Money Multiplier:

𝑀 = 𝐶 + 𝐷, B = C + R
𝐶
𝑀 𝐶+𝐷 +1 𝑐𝑟+1
𝐷
 = = 𝐶 𝑅 =
𝐵 𝐶+𝑅 + 𝑐𝑟+𝑟𝑟
𝐷 𝐷

 𝑀 = 𝑚𝑚 ∗ 𝐵
 𝑚𝑚 is known as ‘money multiplier’.
MONEY MARKET

 How to moderate Money Supply: three instruments.

 Open market operations: Purchases and sales of government bonds.

 Reserve Requirements: Regulating the Central Bank’s requirement of the


minimum reserve deposit ratio.

 Discount rate: The interest rate central banks charges for lending money to other
banks.
MONEY MARKET

“There have been three great inventions since the beginning of


time: fire, the wheel, and central banking ”
(Will Rogers)
MONEY MARKET

Thank you

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