Monetary policy

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 Fiscal policy

Contents

 National budget
 The multiplier
 Impacts of national budget
on the economy
 Fiscal policy
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Monetary policy

Money
The meaning of money
• Money is the set of assets in an economy that
people regularly use to buy goods and services
from other people
• According to the economist’s definition,
money includes only those few types of wealth
that are regularly accepted by sellers in
exchange for goods and services.

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 Money
The functions of money
• Medium of exchange: an item that buyers give to
sellers when they want to purchase goods and services
• Unit of account: the yardstick people use to post
prices and record debts
• Store of value: an item that people can use to transfer
purchasing power from the present to the future
• Liquidity: the ease with which an asset can be
converted into the economy’s medium of exchange

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 Money
Kinds of money
• Commodity money: money that takes the form of a commodity with
intrinsic value
• Fiat money: money without intrinsic value that is used as money because
of government decree
• Bank money: consists of the book credit that banks extend to their
depositors. Transactions made using checks drawn on deposits held at
banks involve the use of bank money.

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 Money
Measures of Money

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 Money
The money multiplier
= c: cash ratio
H
Reservation
= r: reserve ratio
Cash
out of
Central Bank Money
Bank ∆M1 = kM*∆H

M1 = kM*H
=> kM =M1/H
kMand rs: ↑↓
H = Reservation +Cash => k =M
M1 = Cash + Bank Money kMand c: ↑↓
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 Monetary market
Money supply

MS = SM = M1 = C + D

SM Depend on government

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 Monetary market
Money supply – Tools of Central Bank

• Discount interest rate

• Required reserve ratio
• Open Market Operation

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 Monetary marketc
Money Demand
Transaction & precautionary

MD = DM Depend on Speculative SM
rn
r & national output Y

DM= f(r,Y)= D0 + Dmr *r + DmY *Y r0

DM= f(r)= D0 + Dmr *r DM

Quantity of Mone
(Real Money Balance
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 Monetary market
Equilibrium Interest rate

Q 11
 Monetary policy
Expansionary Monetary policy (Y<Yp)

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 Monetary policy
Contractionary Monetary policy (Y>Yp)

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Measuring Monetary policy

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