DSME3080 Macroeconomics

for Managers

p .
10 , 1 川 The Asset Market
Rao Fu

⑦ Spring 2023

1
 spenainu
douliuciansmollnineul
cannol
⼼

b arereonomy :

What is Money 做吾约藏要⾃⼰

)
Pud

do of
⼼
:
⼩ wam7
、

IUGAUE 了
 Money: assets that are widely used and accepted as
payment medlum of exchae )
generally acleprable
as a
(

Q shells , gold ,
311 ver ,

 The functions of money igaverre

D
 Medium of exchange caube muney
( god monmy
⼩
v.

)  Unit of account Characlen )

7

3)  Store of value
⽣ farmer !

2
 Mo = casu

Measuring Money (the U.S.)

narmw
deGmyin of
0
money
of exchaye )
0
s7

 The M1 monetary aggregate ( = medrum

0
50F ( 细% )

 Currency and traveler’s checks held by the public c

cumenlalunl

\
dnounl
⼀
)
Dd
checkny  Transaction accounts deposits 这去旅效 C ⼀般不会收
' 我)
soh
(
:

trausaclim penid
{ ,

Ocasloud  The M2 monetary aggregate ) :

你如有冇 $
=

⽽且 ,
 M2 = M1 + less money like assets ssmd

 Additional assets in 0
M2: 你⼾如必须有⼒可打
 savings deposits CA 最⼤ amponeun )

。
 small (< $100,000) time deposits
fudun shani )
 noninstitutional MMMF balances Cmulua
y muyua
buy sate assrts fom
 money-market deposit accounts (MMDAs) ⼀

)
(n 有 $λ sanyacwum
号 1 λ U
2
的
7 $ 100 .
ow
dpol $ 主要⽤末 sam
3
:你 ② 有 $
)
阿
=
Measuring Money (Hong Kong)
 M1= currency + transaction accounts deposits at banks.
 M2= M1 + time deposits at banks + savings deposits
at banks + negotiable certificates of deposit (NCDs) of
banks held by non-bank public.

 Banks: full license banks

 Quasi banks: restricted license
banks and deposit-taking
companies

4
 上午huan )
hhan
Pollytrilemac
v 只可實识⼯个
)

excuayerdpigl
=

(
chuse
H( (

Money Supply Onmdcocuayerainoyomy

)

→(
你想
n
VSmunngolhy
ponyt
i你就要跟 mneny ) Us
of needs tofoll
…
ctrend

 Money supply = money stock = amount of money

i

available in the economy

overnmenlundam
gu
d
→
 How does the ⽈
central bank of a country increase the
money supply? geunymmk )
Ust

yank
时
)

。  open-market operations : ) 1 o
↑ r

fsaesoveomnemnny
gneantl
品 4 buy
唔⽤分穷竟很你 µ lorUr )
wmpngpum
oaoiusi bund ,

(
.
 Throughout text, use the variable M to represent money
⑦ 型
supply; this might be M1 or M2
)
uriu cnlenn ran
Us negaiuy
= ) µ sP )
= i ↓
5
 Factors that Affect the Portfolio Allocation
nommual yleldto manunly
D Expected return uTerel rale
点?
7
⼀
 Rate of return = an asset’s increase in value per unit of time
_ ) fuaue lounl

0Returns not known in advance, so people estimate their expected

:

return
ra ↓ real relurn 1 arual real
y veruin ⼀

2 Risk oxpeoled rerunml )

 The degree of uncertainty in an asset’s return ( 7 f ( he nsk ↑→
⼀
retuon
( F aurual
你哥副最後
 Risk premium: the amount by which the expected return on a
出 :

都唔知真正
回報有 7 多 )
risky asset exceeds the return on an otherwise comparable safe
asset
of traded duckly
.

引 Liquidity houre caunn he

 The ease and quickness with which an asset can be traded ⼀

47 Time to maturity

 The amount of time until a financial security matures and the
investor is repaid the principal bearmvenshay
ef onfer maunny G

Clyr
also
- bond
loseflexrbiny
] 你可年後再
=

睇再唔再買 Bond )

higherexpeled r
6
 0 Prem 7 um
有

. 3 %

APY
CD
5 % APYboud cD
, ) 1 4 . 3 % bouds /

) ( noulu )
"

( 2 年)
= U Meau >= aerge =
市场 expevled 1 年後 =
) I 跌去 Y 3
𦲷
Types of Assets and Their Characteristics
 People hold many different assets
 Money ( 7 Hund )

 Bonds

 Stocks

打⼀你是營不善
 Ownership of a small business了 ⼆)
你 sell to
oluey

)
cnr ducd
 Housing cnul nqund , bul
)
puenrlal capralgnn
7
Demand for Assets
① ②
 Trade-off among expected return, risk, liquidity, and
time to maturity ④
 Assets with low risk and high liquidity, like checking
accounts, have low expected returns Anasiual
Porlfllo
7 in

 Investors consider diversification: spreading out

investments in different assets to reduce risk
 The amount a wealth holder wants of an asset is his or
her demand for that asset
 The sum of asset demands equals total wealth

8
 2 )
9
vod marlen (
savy 7 nustmem
今⽅⽶
⼀

mavlar ,
。 - labor marlar cassel 不在 µ luul
M3 入⾯

The Demand for Money

v ⽈

⼀
( V⼩ . non -
muelay
⼀ assr 、

 The demand for money is the quantity of monetary

assets people want to hold in their portfolios

 Key macroeconomic variables

demand
,
that affect money
( A
,

weatth realinwme
所有野 wnnaun
:你只想弟
0
PL 对 UD 的彩响 )
⼀

→ )
( 1 to 1 ) E ↑ 1↑ % Unl 3 %

UDTcoPoporMunally )
3
⼀

f
,

1 比 10

@  Price level ↑= =

than llo 1 chay )

bul lu .
n

⑤  Real income ↑ = Un P Co ,

↓ real 7 uwmP
37 .

UDP 1 %
@  Interest rates = )

G carh 7 u7 o
sauy dpunn
youpul
( xous )
= ) if pwple sell slork I punin sayayjonn
UDP (
. )
~ o . c

ouopn
A
9
The Demand for Money real
Punommnal
m MM
P × L(Y, i)
 The money demand function: Md =0
 Md is nominal money demand (aggregate) ( $)
real 会不同 )
 P is the price level ( 不同 Pnurnexs , baseyear = 你的

→
 L is thereall
money
⼀ demand function
⑰ Y is real income or output slock )
( of boud ( .

個  i is the nominal interest rate on nonmonetary assets

 Alternative expression …

rexpecledrealr
 M =P×0
d L(Y, r品+ πe)
时
mrnewreul
31 cause

 Md/P = L(Y, r + πe)

εJu

↓ Vsmhuo
demand
= real Money
10
 sihiy )
Other Factors Affecting Money Demand
 Wealth

nsk for olherasse

))

1
 Risk ↑ ) . ward
f
=

G 有不同例⼦
buy goldlhoue
MD ↓

 Liquidity of alternative assets ↑=) Un ↓

⼀

 Payment technologies

11
 )
-
⼀講 '
M PL 0
=
-

O
LCY , i

The Elasticities of Money Demand

 Elasticity: The percent change in money demand
caused by a one percent change in some factor

 Income elasticity of money demand

4 ↑ = 3 % " u y 2% 、 0

foir non monelary

)
asserluteren
-

 Interest elasticity of money demand ( He elasnunly

Small &
negam )
G 「 =
) ud ↓
= )

 Price elasticity of money demand

12
Velocity and the Quantity Theory of Money
 Velocity (V) measures how much money “turns over”
each period delermmmdby -
7

( suppyo morey
)enlralbank

 V = nominal GDP / nominal money stock = PY / M

↓
—

dP
—

$ lb
$ 3 b
)
⽜ Ud
(
morey dumand ( gord ) &

sernu )
0 Sold )

。 veloony
↓ WheuU ; .
↑
aveige
ou un
iconmurto

$ uis
eacn
urvernynaio
Osuts0
: .

for 3 7 ml )

13
Velocity and the Quantity Theory of Money
UC M
reqmnnmm
=
,

8
 Quantity theory of money: Real money demand is
proportional to real income. M
—

d / P = kY
)
L ( y , i
Tcoune
 Assumes constant| velocity, where velocity isn’t
affected by income or interest rates

 But velocity of M1 is not constant. M2 velocity is

closer to being a constant, but not over short periods

14
Asset Market Equilibrium
 Assume that all assets can be grouped into two
categories, money and nonmonetary assets
 Money includes currency and checking accounts
 Pays interest rate im
 Supply is fixed at M

 Nonmonetary assets include stocks, bonds, land, etc.

 Pays interest rate i = r + πe
 Supply is fixed at NM

15
Asset Market Equilibrium
 Asset market equilibrium occurs when quantity of
money supplied equals quantity of money demanded
non monerayassr
-

 md + ⑤
nmd = total nominal wealth of an 。
individual
 Md + NMd = 軍aggregate nominal wealth (from adding up
individual wealth)
 M + NM = aggregate nominal wealth (supply of assets)

, compunyissudf
 (Md – M) + (NM – NM) = 0
d

16
 Asset Market Equilibrium
( F Ud )
money supply

δ
 The asset market equilibrium condition
④ M / P = L(Y, r + πe) (
nomnmn )
1040 =
nomrua ”

real money supply = real money demand

r MS
) 0
Cbefoueupv

|
gudsmaiion
delermil
'

!
…
以 )
…

↑
↓=→ r

Lefsany ofu …
moemenl
② L( Y ,
i) ↓ MD
哈做野 )
" bauk
Puulewl ceulral
:
assune
☆ eqmlinnum We
∴

goes
>

l ( assume
M
告管
)

Real money supply,

Real money demand 17
Money Growth and Inflation
 With all the other variables in the condition determined, the
0
asset market equilibrium condition determines the price
level
P = M / L(Y, r + πe)

OOsus
 Rewrite the asset market equilibrium condition in growth-
rate terms: camruned ayummnumy

ΔP/P = ΔM/M – ΔL(Y, r + πe)/L(Y, r + πe)

 To predict inflation, we must forecast both money supply

growth and real moneylarlinnf
demand growth
y3 )

π = ΔM/M – (Olannuln
Y ΔY/Y +i Δi/i )
.

0
↓ CmPl =
7
uflalron

18
Money Growth and Inflation
 With all the other variables in the condition determined, the
asset market equilibrium condition determines the price
level
P = M / L(Y, r + πe)

 Rewrite the asset market equilibrium condition in growth-

rate terms:
ΔP/P = ΔM/M – ΔL(Y, r + πe)/L(Y, r + πe)

 To predict inflation, we must forecast both money supply

growth and real money demand growth

Otemi awmntan
π = ΔM/M – (Y ΔY/Y +i Δi/i )
unp -

18
Application: Money Growth and Inflation in the
European Countries in Transition Posril
⼀ 社 lal7
oushp
 The relationship between money growth and inflation

realGDP 勁国即
只 02 -
3 %

)
= : -

acrualyom
µs = )
mamly
devamned

Tuflalivm

⼝
∵
19
The Expected Inflation Rate and the Nominal
Interest Rate

 For a given real interest rate (r), expected inflation (πe)

determines the nominal interest rate (i = r + πe)
π=ΔM/M–( Y ΔY/Y+ i Δi/i)

 What factors determine expected inflation?

 People could relate inflation to the growth rates of the
nominal money supply and real income
 Expectations can’t be observed directly
0

呢⼝
rau 0 )
- bond Creal ruleren
=

.
HC : I

Secunry
⼀
⼀

Tuflarrn
Prorened
US ⼆

Treasuy
⽣同 有
D同
20
Inflation and the Nominal Interest Rate in the United States
trade
also themflalap
= ) valus
can assel
marlar f boudd
IM )
( fuaue -

當時 7
- ≥
bon
(
:

,
21
Readings
 The flawed analogy of Chinese QE | The Economist
 http://www.economist.com/blogs/freeexchange/2015/04/chinas-
monetary-policy

 How to Avoid Paying the Cruelest Tax: Inflation| The WSJ

 https://www.wsj.com/articles/how-to-avoid-paying-the-cruelest-
tax-inflation-11601631007

 In August, Money Supply Growth Hit a Record High for the Fifth
Month in a Row
 https://mises.org/wire/august-money-supply-growth-hit-record-
high-fifth-month-row

22