Topic_3_-_Money_and_Inflation - macro In this chapter you...

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1 macro Money and Inflation Topic 3 Topic 3 – Money and Inflation slide 1 In this chapter you will learn 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. Topic 3 Topic 3 – Money and Inflation Money and Inflation slide 2 The connection between money and prices money and prices Inflation rate = the percentage increase in the average level of prices. price = amount of money required to buy a good. 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. Topic 3 Topic 3 – Money and Inflation slide 3 Money: definition Money: 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. Topic 3 Topic 3 – Money and Inflation Money and Inflation slide 4 Money: functions Money: functions 1. medium of exchange we use it to buy stuff 2. store of value transfers purchasing power from the present to the future 3. unit of account the common unit by which everyone measures prices and values Topic 3 Topic 3 – Money and Inflation Money and Inflation slide 5 Money: types 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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2 Topic 3 Topic 3 – Money and Inflation Money and Inflation slide 6 Discussion Question Discussion Question Which of these are money? a. Currency b. Cheques c. Deposits in chequing accounts (called demand deposits) d. Credit cards e. Certificates of deposit (called time deposits) Topic 3 Topic 3 – Money and Inflation slide 7 The money supply & monetary policy The money supply is the quantity of money available in the economy. Monetary policy is the control over the money supply. Topic 3 Topic 3 – Money and Inflation Money and Inflation slide 8 The central bank The central bank Monetary policy is conducted by a country’s central bank . slide 9 Money supply measures Money supply measures _Symbol Assets included _ C Currency M1 C + demand deposits, travelers’ checks, other chequable deposits M2 M1 + small time deposits, savings deposits, money market mutual funds, money market deposit accounts M3 M2 + large time deposits, repurchase agreements, institutional money market mutual fund balances Topic 3 Topic 3 – Money and Inflation Money and Inflation slide 10 The Classical Theory of Inflation The Classical Theory of Inflation The Quantity Theory of Money How the price level is determined and why it might change over time is called the quantity theory of money.
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