Chapter 3: Modern

Measures of
Money
The evolution of digital currencies over time.
Standard Measure of Money
i nclude the volume of currency in circulation and the volume of deposits
at any point in time.
Standard Measure of Money
i nclude the volume of currency in circulation and the volume of deposits
at any point time.

physical money (bills or coins) Money held on bank accounts

Measures
of
Money
 M1 M2 M3
(Narrow Measures)  (Broader Measures)

= = =
Currency M1 M2
+ + +
Demand Deposits  iquid financial
L  ime Deposits with
T
Assets Banks
Three considerations to
determine assets liquidity:
• How easily and quickly it can be sold
• The cost of selling it
• Stability and predictivity of its price
Inflation
Is a sustained increase in
the price level of
commodities. Deflation
Occurs when money Characterized by an
supply increases faster uncontrolled decline in
than the volume of trade the general price level as
in the economy. a result of undersupply Recession
of money.
Is an economic downturn that
is less severe that last longer
and has a larger decline in
business activity.
The Aggregate Demand- Aggregate
Supply Model

the analysis of the relationship between the nation's money

Monetary Theory
supply and economic activity according to Lloyd B. Thomas

The Aggregate important and useful because it changes money supply and
Demand-Aggregate interest rates, which influence economic activity by shifting
Supply Framework the nations aggregate demand curve

Back to Agenda
The Aggregate
Demand-Aggregate
Supply Model

Vertical Axis - Nation's

price

Horizontal Axis - Real

output level

I ntersection - Nation's
Equilibrium price and
real output levels
The Aggregate Demand- Aggregate
Supply Model

Nation's Aggregate defined as the relationship between the nation's price level
Demand Curve (AD and the amount of real output demanded, other factors
curve) remaining constant

Aggregate Supply as the relationship between the nation's price level and the
Curve (AS curve) amount of output firm's collectively desire to produce, other
factors remaining constant

Back to Agenda
 1. Consumption (C)
Disposable income, wealth, interest rates and

Factors That consumer confidence

2. Investment (I)
Shift the Interest Rates, business confidence, expected growth
of aggregate expenditures or sales ...

Aggregate 3. Government Purchases of Goods and

Demand Curve Services (G)

Expenditures hinge by a state and local government
units

4. Net Exports of Goods and Services (X-

M)
Foreign exchange rate, income in foreign nation
 Factors That Shift
Quantity of Input the Aggregate
Labor, capital, land and raw materials are inputs in the
production process. Supply Curve

Prices of Inputs
Increase in input prices makes production less
profitable at each possible general price level,
shifting AS curves leftward.

Technological Change
Improvements in technology increase the amount of
out put the workforce can produce, shifting the AS
curve rightward.
Some Factors that Shift the Ad
and AS Curves
Recessionary Gap
magnitude in which the
equilibrium output level falls
short of full employment
output
Inflationary Gap
magnitude by which out put
exceeds the full employment
output level
The theory of the value of money

DEMAND FOR MONEY THE VELOCITY OF MONEY

the value of money is measured by

what a unit of money will buy in refers to the rate of turnover of
terms of a representative group of money or the frequency of spending
economic goods. money.

10

11
12
The theory of the value of money

THE STATE OF FINANCIAL

INTEREST RATE LEVELS
TECHNOLOGY

The availability of substitutes for reduces the demand for money

money

10

11
12
The theory of the value of money
ECONOMIC UNCERTAINTY
Money is the safest of all assets
that its value remains constant no
matter what happens in the economy
INFLATION EXPECTATIONS
Reduces the real value of money at a
rate equal to the difference between
the annual inflation rate and interest
rate paid on money.
10
11
12
The theory of the value of money

INCOME LEVEL

Increased in income usually results

in increased expenditures by
individual

10

11
12
Equation of
Exchange
MVT°PT

Where:
M = average money supply in existence in a given year
VT = transactions velocity of money - that is, the number of
times the avegare dollar is spent per year (VT°PT/M)
P = average price of the transactions that take place during
the year, and
T = the number of transactions occurring during the year
The Income
Velocity of Money
MVY°PY

Where:
M = average money supply in existence in a given year
VT = income velocity of money, or the number of times the
average peso is spent on final goods and services per year
(VY°PY/M or GDP/M)
P = average price of all final goods and services during the year
Y = the number of final goods and services produces in the
year, or an index of real GDP relative to the base year
The Demand for
Money
Md=kPY, where
k=Md/PY

Where:
Md = demand for money
k = fraction of GDP(PY)
 Transactions Precautionary
demand for money Demand
demand for money to maintenance of money
finance ordinary balances to meet
expenditures unforeseen
circumstances
 Speculative Demand
includes money balances held
with inhebt of "securing profit
from knowing better than the
market what the future will bring
forth"
The Role of Interest Rates in the
Demand for Money
Interest rates and the Interest Rates and the
Transactions Demand Speculative Demand
Involves money which must be held in order to Demand on Speculative money balances
bridge the inevitable time gap between the inversely related to the interest rate.
receipt of funds and their later disbursement.

Interest Rates and the

Precautionary Demand
Precautionary money holdings may also be
somewhat sensitive to interest rates.

COOKING 101 | MAY 2020

 THE ROLE OF INTEREST RATES IN THE
DEMAND OF MONEY:

We have learned that the demand to hold money may be responsive to the
opportunity cost of holding money-the marketbraye of interest. Each motives
of holding money most costly. This is because money pays a relatively non-
competitive rate of interest, if any. To the extent that the demand for money
and therefore its velocity vary with the interest rates, the link between money
supply and DP expenditures becomes more uncertain because interest rates
fluctuate significantly overtime.
THANK YOU