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ch4amemo - Economics 3307 Main Points of Mankiw Chapter 4...

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Unformatted text preview: Economics 3307 Main Points of Mankiw, Chapter 4: Money and Inflation 1. Inflation is the percentage change in the price level: π t = (P t- P t-1 )/P t-1 2. Average inflation rates (over 10 year time periods, say) vary widely across time in any given country and across countries at any given time. Inflation was much higher in the U.S. in the 1970s than in the 1980s, for example. Also, inflation in Germany since World War II has been lower on average than inflation in the U.S. 3. Basic Points in this chapter: (i) The average price level (P) is determined by the money supply (M), and (ii) Inflation (the percentage increase in P) is determined primarily by the money supply growth (the percentage increase in M). 4. The 3 functions of money are: (i) store of value, (ii) unit of account, and (iii) medium of exchange. 5. Types of money include: (i) Fiat money, which has no intrinsic value (ii) Commodity money, which has the intrinsic value of the commodity used as money. Gold and silver are the 2 commodities that have been most widely used as money. 6. All countries now have fiat money, but in the past (the late 1800s, say), commodity money was common. Commodity money evolves to fiat money as follows: Gold Gold Gold Fiat Bullion ==> Coins ==> Certificates ==> Money 7. The quantity of money in the economy is controlled by the central bank . The U.S. central bank (which is actually a system of banks) is called the Federal Reserve System . The German central bank is the Bundesbank . The Japanese central bank is the Bank of Japan . 8. In developed economies, central banks influence the money supply by open market operations: purchases and sales of assets such as government bonds or foreign currencies. When a central bank purchases an asset in the open market, it in effect creates the money to pay for the asset. It creates money electronically through the banking system in a way that is rather involved, but the effect is the same as it would be if the central bank simply printed up new currency to buy the asset. rather involved, but the effect is the same as it would be if the central bank simply printed up new currency to buy the asset....
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This note was uploaded on 04/30/2008 for the course ECO 3307 taught by Professor Green during the Spring '08 term at Baylor.

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ch4amemo - Economics 3307 Main Points of Mankiw Chapter 4...

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