[经管营销]01_Monetary Policy.pdfVIP

Applied Macro International Economics Dr. J. Huang, Lingnan (University) College, Sun Yat-sen University Topic 1 Topic 1 Monetary Policy Case: The German Hyperinflation Money Monetary Policy What is money? We may try to define money as the medium of exchange. Money serves as a. Medium of exchange b. unit of account (arbitrary unit) c. store of value (one of many) Definitions of money in the US • M1: currency + demand deposits (checking accounts) • M2: M1 + money market mutual funds + savings accounts • M3: M2 + repurchase agreements + eurodollars + large-denomination time deposits • L: M3 + savings bonds + commercial paper + short- term treasuries Monetary Base and Money Multiplier Equation: MB ×m = M1 • Monetary base (MB): Banking system reserves plus currency held by the public. • Money multiplier (m): In a simple monetary system, the ratio of 1 divided by the reserve ratio. [see next slide] • Money supply (M1): Basic definition of the money supply. Money Multiplier • It tells what the total increase in checking account deposits would be for any initial cash deposit • Money Multiplier = 1 / reserve ratio • In the banking system, an initial cash deposit triggers additional rounds of deposits and lending by banks • This leads to a multiple expansion of deposits • The money creation process and the money multiplier also works in reverse The money demand curve • The “price” of holding money Interest rate is the opportunity cost of the interest income foregone. • Money is held as a convenience Money to finance transactions and