Money,Inflation,andExchangeRatesintheLongRun.ppt

Money, Inflation, and Exchange Rates in the Long Run Money, Inflation, and Exchange Rates in the Long Run What is Money? Where does Money Come From? From the Equation of Exchange to a Theory of Inflation Policy Implications of the Quantity Theory of Money The Long-Run Dichotomy Money, Inflation, and Exchange Rates in the Long Run Exchange Rates and Inflation Exchange Rate Determination The Balance of Payments Account Balance of Payments Forces Price Levels Exchange Rates Real Exchange Rates Purchasing Power Parity What is Money? Money is a financial asset. Money is: a unit of account everything is priced in the units of money a store of value money holds its value over time a medium of exchange money is universally accepted in transactions Measuring Money The Federal Reserve Bank is the agency responsible for measuring money. The Fed defines several measures of money based on liquidity. Liquidty is the ability to easily exchange one financial asset for another. M1 is the most liquid measure. L is the broadest and least liquid measure. Measures of Money: M1 Currency Coins and bills Checkable deposits Deposits in checking accounts Travelers’ checks Checks issued by banks and accepted as cash Measures of Money: M2 M1 plus Savings deposits Deposits in accounts with no checking privileges Small time deposits Deposits of less than $100,000 that have an explicit maturity and a penalty for early withdrawal Money market mutual fund shares Short-term securities that come with check-writing privileges Measures of Money: M3 M2 plus Large time deposits Deposits of greater than $100,000 that have an explicit maturity and a penalty for early withdrawal Institutional money market fund shares Shares, held by corporations, of a fund that invests in short-term securities that come with check-writing privileges Repurchase agreements (RPs) Sales of securities with the agreement to repurchase Eurodollars Dollars or other currency depostied in banks outside the currency’s country of