money - Money and Inflation UCLA Winter 2008 Professor Mark...

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Money and Inflation UCLA Winter 2008 Professor Mark Wright
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1 Introduction z In 1913, the value of all the money circulating in Germany was 6 billion marks z In October 1923, 6 billion marks was barely enough to buy a loaf of bread z By November 1923, a loaf of bread would cost 428 billion z The German hyperinflation of the early 1920’s is the most famous, but far from the only or even the worst, hyperinflation of the 20 th C z It had tragic world consequences: November 8th, 1923, Hitler and 2000 Nazis marched through the streets of Munich to take over a political meeting at the Munich Beer Hall. On the 9th November, 13 Nazis were shot by police in a street protest Hitler was arrested for treason and put on trial. This trial made Hitler and the Nazi’s famous In May 1924, 32 Nazi’s were elected to the Reichstag
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2 In this section, you will learn… z The classical theory of inflation causes effects social costs z “Classical” – assumes prices are flexible & markets clear z Applies to the long run z Application to hyper -inflation in Germany
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3 Reading z Abel, Bernanke and Croushore: Chapter 7 z These slides (I got a little over-excited in making slides) z Some optional readings on website
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4 U.S. inflation , 1960-2006 0% 3% 6% 9% 12% 15% 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 % change in CPI from 12 months earlier
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5 The connection between money and prices z Inflation rate = the percentage increase in the average level of prices. z Price = amount of money required to buy a good. z Because prices are defined in terms of money, we need to consider the nature of money, the supply of money, and how it is controlled.
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6 Money: Definition Money Money is the stock is the stock of assets that can be of assets that can be readily used to make readily used to make transactions. transactions.
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7 Money: Functions z medium of exchange we use it to buy stuff z store of value transfers purchasing power from the present to the future z unit of account the common unit by which everyone measures prices and values
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8 Money: Types 1. fiat money has no intrinsic value example: the paper currency we use 2. commodity money has intrinsic value examples: gold coins, cigarettes in P.O.W. camps
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9 Discussion Question Which of these are money? a. Currency b. Checks c. Deposits in checking accounts (“demand deposits”) d. Credit cards e. Certificates of deposit (“time deposits”)
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10 The money supply and monetary policy definitions z The money supply is the quantity of money available in the economy. z Monetary policy is the control over the money supply.
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11 The central bank z Monetary policy is conducted by a country’s central bank . z In the U.S., the central bank is called the Federal Reserve (“the Fed”). The Federal Reserve Building Washington, DC
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12 Money supply measures, April 2006 amount ($ billions) assets included symbol $6799 M1 + small time deposits, savings deposits, money market mutual funds, money market deposit accounts M2 $1391 C + demand deposits, travelers’ checks, other checkable deposits M1 $739 Currency C
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13 The Quantity Theory of Money z A simple theory linking the inflation rate to the growth rate of the money supply.
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This note was uploaded on 03/01/2009 for the course ECON 102 taught by Professor Serra during the Spring '08 term at UCLA.

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money - Money and Inflation UCLA Winter 2008 Professor Mark...

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