Chapter 2 The Role of Money in the Macroeconomy 2.1 Money plays a key role in the performance of the economy. The amount of money in the economy should not be too little or too much, but just “right”? 2.2 Definitions of the money supply 2.2.1 liquidity and liquid asset 1. liquidity (流动性) Ability to convert an asset into cash quickly with little Loss in value. 2. 资产的流动性依赖于： 买进或卖出的难易程度 买卖交易成本 它的价格的稳定性和可预计性 3. liquid asset -illiquid assets A liquid asset is something you can turn into the generally acceptable medium of exchange quickly without taking a loss. Cash and checking accounts are the most liquid assets 2.2 Three definitions of the money supply M1 = Currency outside banks banks + demand deposits at banks + other checkable deposits at banks and at all thrift institutions + travelers’ checks 通货 + 活期存款 + 在银行和所有储蓄机构的其它支票存款+旅行支票 M2 = M1+ small-denomination time deposits + money market deposits accounts and savings deposits at all depository institutions + retail money market mutual funds shares M2 = M1+ 小面额定期存款 + 货币市场存款帐户和在所有储蓄机构的储蓄存款 + 非机构所有的货币市场互助基金份额 M3 = M2+ large-denomination time deposits at all depository institutions + institutional money market mutual funds shares + bank repurchaseagreements and Eurodollars M3 = M2 + 在所有储蓄机构的大面额定期存款 + 机构所有的货币市场互助基金 份额 + 定期回购协议 + 定期欧洲美元 现阶段我国货币供给量划为3个层次 M0 = cash （狭义货币） M1 M2 对通货，各国的解释是一致的，指不兑现的银行券和辅币 ，我国习惯称之为现金。 2.3 Who Determines the Money Supply? 2.3.1 Gold does not determine the money supply, because gold has little influence on it. Therefore, currency and checking accounts can be increased or decreased, without any relation to gold. Does it make you distrust the value of your money ? Money is valuable only because you can buy what you need with it. The value of money is determined by the prices of the things we buy. 2.3.2 If gold is not the watchdog, who or what does determine the amount of money ? It is central bank, the monetary authority in most countries. The central bank does not deal directly with the public. It is regarded as a bank for banks and responsible for the execution of national monetary policy. Most part of currency enters circulation, when people and business firms cash checks at banks. It is public who ultimately decides the proportion of the money supply being in the form of currency. The central bank wholesale the necessary coins and paper to bank. The central bank is not particularly concerned with the fraction of the money supply that is in one form or another , but rather the total amount of checkable deposits plus currency. 2.4 The Importance of Money I money versus barter 2.5 The Importance of Money II Money II is related with financial institutions & markets. Money contributes the economic growth and development by stimulating both the saving and investment and facilitating the transfers of funds from the savers to the borrowers. Because of the operation of the financial markets, savings can easily changed into investment, the economy is better off. Why ？ The only way an economy can grow is by allocating part of its resources to the creation of new and more productive facilities. A lot of financial instruments are created in the financial markets . The financial institution have appeared . Both the saver-lenders and borrower-spenders gain from the existence of money. Uncontrolled money, may cause much trouble, even disaster, that is serious inflation. 2.6. Money, the economy and inflation 2.6.1 Bank Reserves and the Money supply Checking accounts come into being when banks extend credit. When banks contract credit, checking accounts disappear. A bank can expand its checking accounts by providing loans or buying securities. But the central bank would ask banks to hold reserves against their checking accounts liabilities. 2.6.2 How large should the money supply be? Too much money supply causes inflation, while too little money supply brings the recession，deflation . 2.6.3 Velocity: the missing link 2.6.4 What is inflation? vIt is defined as too much money chasing too few goods. vIt refers to situation where prices rise to keep up with increased production costs, with the result that the purchasing power of money falls. vIt can also be defined as general increases in prices. The opposite is deflation. 2.6.5 Major types of inflation According to the degree of increase of price, inflation can be divided into the following: Zero inflation Low inflation : It refers to inflation between 1%-4%. Moderate inflation : This means inflation fluctuating between 5%- 9% without sign of further increase beyond this range. High inflation : This refers to double-digit inflation which normally moves between 10%-30%. Hyperinflation : It refers to a situation where inflation occurs in hundreds of percent or even thousands of percent per year. According to the reasons causing inflation , inflation can be divided into the following: Demand-pull inflation : It occurs when the total demand for goods and services exceeds the available supply of goods and services in the short run. The excess demand, or excess spending, may result from several causes Cost-push inflation : It may occur with increased wages, higher material costs, or increased prices of consumer goods Structural inflation : It arises when there is a substantial shift in demand to the products if one industry away from other industries. Social inflation : It results from the increasing demand for more services in the form of higher Social Security Payment, wider health care coverage, better rent subsidies, and other social services.. 2.6.6Causes of inflation Demand-pull inflation Cost-push inflation Demand and supply jointly pushed inflation Structural inflation 2.6.6 Economic and social effects of inflation inflation and economic growth effects of income re-distribution effects of asset portfolio adjustment high inflation and economic and social crises 2.6.7 deflation vdefinition of deflation vcauses of deflation