Ngân hàng, tín dụng - Chapter 2: The role of money in the macroeconomy

1Copyright © 2009 Pearson Addison-Wesley. All rights reserved. Chapter 2 The Role of Money in the Macroeconomy Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 2-2 Learning Objectives • Understand the role of money in an economy • Comprehend the different measurements of money used in the United States • See how the money supply drives inflation and economic expansion Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 2-3 Introduction • Recurrent theme—What is the proper amount of money for the economy? • Sir William Petty (1623–87) wrote in 1651 • “To which I say that there is a certain measure and proportion of money requisite to drive the trade of a nation, more or less than which would prejudice the same” – Too much money will lead to inflation – Too little money will result in an inefficient economy 2Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 2-4 Introducing Money • Uses of Money – Medium of exchange—means of payment – A store of wealth—retains its value over time – Standard of value—unit of account used to compare prices and relative values • Liquid Asset – Something that can be turned into a generally acceptable medium of exchange, without loss of value – Liquidity is a continuum from very liquid to illiquid – Currency and checking accounts are most liquid assets Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 2-5 Primary Definition of Money (M1) • Currency outside banks plus checking accounts (demand deposits) • Currency held by banks is not part of money supply • Checking accounts are not legal tender, but commonly accepted as payment • Other definitions of money (M2) start with M1 and add progressively less liquid financial assets • Refer to following page for basic composition of the money supply (M1 and M2) • Most economists prefer the narrow definition of money supply (M1) since it is generally acceptable as a means of payment Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 2-6 Composition of the Money Supply • M1 – Currency outside banks – Checkable deposits (demand deposits) • M2 – Small-denomination time deposits (CD’s) – Money market deposits – Savings deposits – Retail money market mutual funds 3Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 2-7 Who Determines Our Money Supply? • Gold does not determine the money supply—this link was abolished in 1968 • Central Bank (Federal Reserve System)[Fed] does not deal directly with the public (banker’s bank) and is responsible for execution of national monetary policy – Created by Congress in 1913 – Twelve district Federal Reserve Banks scattered throughout the country – Board of Governors located in Washington, D.C. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 2-8 Who Determines Our Money Supply? (Cont.) • Fed influences the total money supply, but not the fraction of money between currency and demand deposits which is determined by public preferences • Fed implements monetary policy by altering the money supply and influencing bank behavior Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 2-9 The Importance of Money: Money Versus Barter • Barter—direct exchange of goods/services for other goods/services – Very inefficient and limited economy – No medium of exchange or unit of account – Requires double coincidence of wants—“I have something you want and you have something I want” – Items must have approximate equal value – Need to determine the “exchange rate” between different goods/services 4Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 2-10 The Importance of Money: Money Versus Barter (Cont.) • Money – Any commodity accepted as medium of exchange can be used as money (commodity money) – Certainty of exchange – Frees people from need to barter – Makes exchange more efficient – Permits specialization of labor—sell one’s labor to the market in exchange for money to purchase goods/services Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 2-11 The Importance of Money: Money Versus Barter (Cont.) • Money (Cont.) – Prices, expressed in money terms, permit comparison of values between different goods – Must retain its value—the value of money varies inversely with the price level (inflation) – Rely on the Fed to control the supply of money to preserve the value of money – If money breaks down as a store of value (hyperinflation), economy resorts to barter Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 2-12 The Importance of Money Financial Institutions and Markets • For an economy to grow, it must forgo present consumption (save) and invest in new capital assets • Money contributes to economic development and growth by stimulating savings and investing • Money separates the act of saving from investing 5Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 2-13 The Importance of Money Financial Institutions and Markets (Cont.) • Savers receive interest payments and investors expect to earn a return over the cost of borrowing • Financial institutions and markets act as intermediaries between savers and borrowers Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 2-14 Money, The Economy, and Inflation • Money has value because people believe it will be accepted as a means of payment, as a store of value, and as a standard of value • Bank Reserves and the Money Supply – Demand deposits (money) are created when banks extend loans through the issuance of credit – Banks are required by the Fed to hold reserves in the form of vault cash or on deposit with the Fed against checking account liabilities (demand deposits). – Current the reserve requirement is approximately 10% of demand deposits Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 2-15 Money, The Economy, and Inflation (Cont.) • Bank Reserves and the Money Supply (Cont.) – Banks create money by making loans with excess reserves, those above the Fed’s required level of reserves – Through manipulation of excess reserves, Fed influences the federal funds rate (rate banks charge for overnight loans), bank lending, and, therefore creation of money 6Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 2-16 Money, The Economy, and Inflation (Cont.) • How Large Should the Money Supply Be? – Purchase goods/services economy can produce, at current prices – Generate level of spending on Gross Domestic Product (GDP) that produces high employment and stable prices – Monetary Policy is used as a countercyclical tool—vary the money supply to influence economic activity Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 2-17 Money, The Economy, and Inflation (Cont.) – Increases in money supply alters public’s liquidity and influences spending through portfolio adjustment • Direct Impact—excess liquidity is spent on goods/services • Indirect Impact—purchase financial assets which lowers interest rates which stimulates business investment and consumer spending • However, changes in liquidity may alter demand for money and not influence GDP—people hoard the additional money • Public’s reaction to changes in liquidity is not consistent, so Fed cannot always judge impact of a change in money supply Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 2-18 Money, The Economy, and Inflation (Cont.) • Velocity: The missing Link – When the Fed increases the money supply, recipients of this additional liquidity probably will spend some on GDP – However, it is possible the public will choose to hold onto the additional liquidity (hoarding of money) – Over time there will be a multiple increase in spending 7Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 2-19 Money, The Economy, and Inflation (Cont.) • Velocity: The missing Link (Cont.) – Velocity of money • M x V = GDP, where M is money supply and V represents velocity • The number of times the money supply turns over in a period of time to support spending on output • Technically, velocity is determined by dividing the cumulative increase in GDP by the initial increase in the money supply • The Fed has no control over the velocity of money since this is dependent on behavior of the public – Ultimately, the Fed needs to be concerned whether the additional spending which results from increased money supply will result in higher production or higher prices Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 2-20 Money, The Economy, and Inflation (Cont.) • Money and Inflation – Inflation—Persistent rise of prices – Hyperinflation—Prices rising at a fast and furious pace – Deflation—Falling prices, usually during severe recessions or depressions – Inflation reduces the real purchasing power of the currency—can buy fewer goods/services with the same nominal amount of money Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 2-21 Money, The Economy, and Inflation (Cont.) – Economists generally agree that, in the long-run, inflation is a monetary phenomenon—can occur only with a persistent increase in money supply – Increase in money supply is a necessary condition for persistent inflation, but it is probably not a sufficient condition • Case 1—Economy in a recession. Expanding money supply may lead to more employment and higher output • Case 2—Economy near full employment/output. Expanding money supply can lead to higher output/employment, but also higher prices • Case 3—Economy producing at maximum. Expanding money supply will most likely lead to increasing inflation. 8Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 2-22 TABLE 2.1 Two Definitions of the Money Supply (February 14, 2008)