Professional Documents
Culture Documents
§ Eg:
§ Cash in your wallet => money?
§ Shares you owned at Microsoft Corp => money?
The kinds of Money
Commodity money: takes
the form of a commodity with
intrinsic value.
§ Eg: gold coins.
Fiat money: money without - paper
intrinsic value, used as - polime
- banking
rr = rrr + er
Loans Loans
$90.00 $81.00
§ If R = 10% for SNB, it will loan all but 10% of the deposit.
Bank and the Money Supply: An Example
3. The Discount Rate: the interest rate on loans the Fed makes
to banks.
• Price level P
P → MD
P → MD
• Interest rate
i → MD
i → MD
• Income
Y → MD
Y → MD
MDr = MDn/P = L(Y,i) = kY - hi
MONEY DEMAND CURVE
i
i1 B
i0 A
MD
M1 M0 M
MONEY DEMAND CURVE
In short:
§ When i changes, other factors remain unchanged -> a
movement along MD.
§ When i remain unchanged, other factors change -> a shift of
MD.
A SHIFT OF MONEY DEMAND CURVE
i
i1
i0
MD0 MD1
M1 M0 M’1 M’0 M
MONEY SUPPLY CURVE
MS
i
M0 M
THE EQUILIBRIUM IN THE MONEY
MARKET
i MS
i0 E
MD
M0 M
MONEY POLICY
• MONEY POLICY involves Central Bank’s usage of tools to impact on
the money market through which they influence the aggregate
demand and the output.
• Policy objectives:
q Stability of the currency
q Full employment
q Economic prosperity and welfare
MONEY POLICY
MONEY POLICY
EXPANSIONARY CONTRACTIONARY
40
EXPANSIONARY MONEY POLICY
i0
E
i1
MD
M0 M1 M
Mechanism
P
AS
P1
P0
AD0 AD1
Y0 Y1 Y
Mechanism
P
Y Y *
: MS i I AD Y
P u
Mechanism
i MS1 MS0
i1 E1
i0 E0
MD1
M1 M0 M
Mechanism
P AS
P0 E0
P1 E1
AD0
AD1
Y1 Y0 Y
Mechanism