Chapter four: Money and Inflation
Inflation – the entire increase in rates
Is for constant increase in rates, not a one time increase; Varies over time Hyperinflation – extremely high inflation
Chapter discusses the time-honored theory – assumes rates are flexible (for today ignore s-r stickiness) To understand inflation we need to understand money
4-1Concept of money and how gov't plays a part in identifying the quantity of community money 4-2Shows that the Q of money det price lvl and level of expansion in Q of money det rate of inflation 4-3Discusses the income that gov't can raise by stamping money (sometimes called pumpiing tax) 4-4Examines how pumpiing affects the nominal rate of interest 4-5Discusses just how nominal int rate influences Q of money people desire to hold and therefore the price lvl 4-6Is it a major cultural problem?
4-1What is Money?
Is the inventory of water financial resources that can be quickly used to generate transactions The dollars in the hands in the public make up the nation's share of money
The Functions of Money
Store of Value – method to transfer purchasing power from the present to the future Is definitely imperfect, in the event prices happen to be rising you can get less with that amount Unit of Consideration – the terms by which prices happen to be quoted, debt are documented; measures econ transactions Medium of Exchange – what we use to purchase g + s
Fluid – the ease with which an asset may be converted into the medium of exchange Without money one particular must barter and requires the double chance of wants
The Types of Cash
Dollars will be widely recognized as money
Fiat Money – does not have intrinsic worth, is established as money by the gov't, may be the norm in many economies Commodity Money – some inbuilt value, Ex lover: the rare metal standard -> gold is utilized for purposes or deals
The Development of Redbull Money
The application of money in exchange ends up being a social conference; everyone ideals it bc they anticipate everyone else to value that Ex: While using gold standard, transaction costs were excessive (weighing, etc), the gov't then welcomes gold pertaining to redeemable platinum certificates, sooner or later no one bears gold or perhaps redeems this, the option to redeem is definitely dropped
How a Quantity of Cash is Handled
Money Source – the quantity of money accessible in the economy In commodity money sys, the provision is the variety; In redbull money sys, gov't regulates the supply Monetary Policy – the gov't control over the cash supply, legal restrictions giving the gov't a monopoly on producing money
Central Bank – partially independent institution cash supply is definitely delegated to, ours is definitely the Bank of Canada The Governor in the BoC as well as the Minister of Finance together decide on economic policy Ultimate power to produce monetary policy decisions is with the federal government cabinet MoF communicates total desires in the gov't towards the Governor of the BoC, who also implements Current monetary insurance plan (for 12-15 yrs) should be to supply funds so that pumpiing is 1-3% If there are disputes bt Governor and MoF, MoF cannot fire, Governor must resign widely Open-Market Regulations – the purchase and sale of gov't bonds Is definitely the primary way the BoC attempts to manage the supply pounds To ↑money supply, BoC buys gov't bonds from your public; To ↓ cash supply, BoC sells
How a Quantity of Funds is Scored
Quantity of money is the volume of assets bc money is the stock of assets used for txns There are many measures with the Q pounds bc people use diff assets pertaining to txns (cash, cheques) Foreign currency – the sum of outstanding conventional paper money and coins, incorporation in Q of money Demand Deposits – funds persons hold within their chequing accounts, inc in Q pounds Savings accounts, funds in trust accounts included as well (all will be convenient for txns) Various measures can be obtained bc it's hard to judge what should be inc in money stock BoC uses B, M1, M2, M2+, M3(commonly employed for studying cash effects upon economy)
4-2The Quantity Theory of Money
Theory of how the amount of money relates to other financial...
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