chap04 - CHAPTER 4 In this chapter, you will learn The...

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1 M ACROECONOMICS ACROECONOMICS C H A P T E R SIXTH EDITION N. . GREGORY REGORY MANKIW ANKIW Money and Inflation 4 CHAPTER 4 Money and Inflation slide 1 In this chapter, you will learn… ± The classical theory of inflation ± causes ± effects ± social costs ± “Classical” – assumes prices are flexible & markets clear ± Applies to the long run U.S. inflation and its trend, 1960-2006 slide 2 0% 3% 6% 9% 12% 15% 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 long-run trend % change in CPI from 12 months earlier CHAPTER 4 Money and Inflation slide 3 The connection between money and prices ± Inflation rate is the increase in the average price level. ± Price is amount of money required to buy a good. ± $1 for a bottle of Coke. We think of the price of Coke as $1. We can also think of the price of a dollar as 1 Coke. Now if Coke is $2. We can think of the price of money as ½ a Coke. Inflation means money is worth less. ± We will treat money like a good in the economy. Inflation, the evolution of its price is determined by supply and demand. CHAPTER 4 Money and Inflation slide 4 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. CHAPTER 4 Money and Inflation slide 5 Money: Functions Medium of exchange We use it to obtain goods Give cashier money he gives you a sandwich. Store of value Can transfer purchasing power over time $10 in your wallet can be spent anytime. Unit of account Common unit everyone measures prices with $4 latte. Clear how much money. Not clear how many economics lectures it’s worth.
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2 CHAPTER 4 Money and Inflation slide 6 Money: Types 1. Fiat money (Government Ordered) ± 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 CHAPTER 4 Money and Inflation slide 7 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”) CHAPTER 4 Money and Inflation slide 8 The money supply and monetary policy definitions ± The money supply is the quantity of money available in the economy. ± Monetary policy is the control over the money supply. CHAPTER 4 Money and Inflation slide 9 The central bank ± Monetary policy is conducted by a country’s central bank . ± In the U.S., the central bank is called the Federal Reserve (“the Fed”). The Federal Reserve Building Washington, DC CHAPTER 4 Money and Inflation slide 10 Money supply measures, July 2008 $ 7726.2 M1 + small time deposits, savings deposits, money market mutual funds, money market deposit accounts M2 $ 1401.0 C + demand deposits, travelers’ checks, other checkable deposits M1 $ 774.7 Currency C amount ($ billions) assets included symbol CHAPTER 4 Money and Inflation slide 11 The Quantity Theory of Money ± A simple theory linking the inflation rate to the growth rate of the money supply.
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chap04 - CHAPTER 4 In this chapter, you will learn The...

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