... THE DEMAND FOR MONEY Chapter Outline • The Components of the Money Stock • Financial Innovation • The Functions of Money • The Demand for Money: Theory • Transactions Demand • The Precautionary Motive • The Speculative Demand for Money • Empirical Results for M2 Demand • The Income Velocity of Money • Working With Data Changes from the Previous Edition The material in this chapter has been updated, but the basic organization has not changed. Learning Objectives • Students should be able to identify the different functions of money. • Students should be familiar with the concept of money illusion. • Students should be able to identify the different monetary aggregates, especially M1 and M2, and they should know the approximate current values for M1, M2, V1, and V2. • Students should be able to identify some of the possible explanations for the increased instability of money demand the income velocity of money. • Students should be able to distinguish between the three different motives for holding money balances (transaction, precaution, and speculation). • Students should understand why the demand for money decreases with an increase in the interest rate and increases with an increase in income. • Students should know the implications of the square-root formula that is derived from the Baumol-Tobin transactions demand model. • Students should be aware that holding money has an opportunity...
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...Principles of Macroeconomics, 9e - TB1 (Case/Fair/Oster) Chapter 18 Debates in Macroeconomics: Monetarism, New Classical Theory, and Supply-Side Economics 18.1 Keynesian Economics 1 Multiple Choice 1) Who wrote the General Theory of Employment, Interest, and Money? A) Adam Smith B) David Ricardo C) Milton Friedman D) John Maynard Keynes Answer: D Diff: 1 Topic: Keynesian Economics Skill: Fact 2) Keynesian economics includes the idea that A) economic policies are ineffective. B) the economy is basically stable. C) prices adjust to clear the markets. D) labor markets don't always clear due to wage rigidities. Answer: D Diff: 1 Topic: Keynesian Economics Skill: Fact 3) Among the propositions of the Keynesian school of thought is A) economic policies are ineffective. B) aggregate supply management is the key to a stable economy. C) aggregate demand determines equilibrium output. D) rational expectations. Answer: C Diff: 1 Topic: Keynesian Economics Skill: Fact 4) Keynes believed which of the following? A) The government has a role to play in fighting inflation, but not in fighting unemployment. B) The government has a role to play in fighting unemployment, but not in fighting inflation. ...
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...What Is the Quantity Theory of Money? By Reem HeakalAAA | The concept of the quantity theory of money (QTM) began in the 16th century. As gold and silver inflows from the Americas into Europe were being minted into coins, there was a resulting rise in inflation. This led economist Henry Thornton in 1802 to assume that more money equals more inflation and that an increase in money supply does not necessarily mean an increase in economic output. Here we look at the assumptions and calculations underlying the QTM, as well as its relationship to monetarism and ways the theory has been challenged. QTM in a Nutshell The quantity theory of money states that there is a direct relationship between the quantity of money in an economy and the level of prices of goods and services sold. According to QTM, if the amount of money in an economy doubles, price levels also double, causing inflation (the percentage rate at which the level of prices is rising in an economy). The consumer therefore pays twice as much for the same amount of the good or service. Another way to understand this theory is to recognize that money is like any other commodity: increases in its supply decrease marginal value (the buying capacity of one unit of currency). So an increase in money supply causes prices to rise (inflation) as they compensate for the decrease in money's marginal value. The Theory's Calculations In its simplest form, the theory is expressed as: MV = PT (the Fisher Equation) Each variable...
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...Financial Sector Deepening (FSD) Trust of Kenya and Pep Intermedius for providing us with data. Financial support for this research was graciously provided by the NBER Africa Success Project. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research. © 2011 by Isaac Mbiti and David N. Weil. All rights reserved. Short sections of text, not to exceed two paragraphs, may be quoted without explicit permission provided that full credit, including © notice, is given to the source. Mobile Banking: The Impact of M-Pesa in Kenya Isaac Mbiti and David N. Weil NBER Working Paper No. 17129 June 2011 JEL No. E40,O16,O33 ABSTRACT M-Pesa is a mobile phone based money transfer system in Kenya which grew at a blistering pace following its inception in 2007. We examine how M-Pesa is used as well as its economic impacts. Analyzing data from two waves of individual data on financial access in Kenya, we find that increased use of M-Pesa lowers the propensity of people to use informal savings mechanisms such as ROSCAS, but raises the probability of their being banked. Using aggregate data, we calculate...
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...debts and requires hat cash or checks denominated in dollar bills be use dint he payment of taxes. 4.1 The reason Congress set up a Federal Reserve System in 1913 is because those who deposited money into their accounts weren’t able to get their money back due to the fact that banks loan less than 100 percent of deposits and then loans the rest of the money to someone else. They set this up in order for the nation to have a safer, more flexible, and more stable monetary and financial system 4.2 In order for the Feds to control the money supply, the Feds use these policy tools to control the money supply (1) open the market operations (2) discount policy and (3) reserve requirements. The most important tool is checking account deposits. 4.3 The reason why an open market purchase of Treasury securities by the Federal Reserve increases bank reserves is because when the sellers of the treasury deposit the funds in their bank, the reserves of the banks rise. The reason why an open market sale of treasury securities by the Federal Reserve decreases bank reserves is because the FOMC directs the trading desk to sell treasury securities, causing the reserves of the bank to fall. 4.4 The shadow banking system is non financial institutions that borrow money in the short term and take that money to invest in long-term assets. They are more vulnerable because (1) the government agencies that regulated the commercial...
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...mattress and deposits it in a demand deposit, by how much may the deposit expand the total money supply? Assume that the legal reserve requirement (required reserves ratio) is 20%. What is the effect of raising the legal reserve requirement to 50%? Since multiplier effect needs to be considered, the total increase in money supply at $10,000 would equal to $50,000 = [$10,000x(1/20%)=$50,000]. If the legal reserve requirement is increased to 50%, the total money supply would expand by only $20,000 = [10,000x(1/50%)=20,000]. From this example we can conclude that the lower the reserve requirement the higher the total expansion of money supply. 2. Describe how Open Market Operations can be used in an expansionary monetary policy. Fed could use Open Market Operations in order to achieve lower target for federal funds rate by buying bonds from banks and public. Purchase of bonds increases the reserves in the banking system, which in turn aids expansion of economy. 3. What happens to the money supply if the FED raises the discount rate? Describe the effect on the banking system and on the money supply. (2 pts) The Fed raises discount rate when it wants to discourage commercial banks from borrowing the money. By doing so the Fed hinders the ability of banks to get additional reserves and lend to businesses or public. The Fed usually does this when they want to restrict the money supply to prevent rapid rise of inflation or other economic perils. 4.Consider a full...
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...Money and Inflation: A review to a Nepalese Context Money and Money Supply Money is the stock of assets that can be readily used to make transactions. Money supply is the quantity of money available in the economy. Money supply is considered as a major contributor to inflation. Monetary policy is the control over the money supply. Monetary policy is conducted by a country’s central bank. In Nepal, Nepal Rastra Bank serves as a central bank. There are different lags on the effect of money supply on inflation. M1 or Narrow Money Supply It is a category of the money supply that includes all physical money such as coins and currency; it also includes demand deposits, which are checking accounts. M1 is used to quantify the amount of money in circulation. M1 is a very liquid measure of the money supply, as it contains cash and assets that can quickly be converted to currency. M1=Currency + demand deposits, travelers’ checks, other checkable deposits M2 or Broad Money Supply It is a category within the money supply that includes M1 in addition to total time-related deposits, savings deposits, and non institutional money market funds. M2 is used when looking to quantify the amount of money in circulation and trying to explain different economic monetary conditions. In Nepal, Broad money supply, M2 has a lagged and temporary effect on inflation. However, compared to other factors such as India’s inflation and international oil prices, M2 has a minor role in contributing to...
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...Quantity theory of money (QTM) – suggests that the demand for real money balances is proportional to income. Quantity eqn.: MxV=PxT where M – money supply; V – velocity of money: the # of times a PhP bill changes hands for time, t; P – price level; and, T – transactions. 1 13/10/2015 Income (Y) version of the QE: MxV=PxY ◦ where V: the # of times a PhP bill enters someone’s income; ◦ P x Y: nominal GDP. This version of the QTM is used since it is difficult to observe transactions. Money Demand & the Quantity Theory of Money: uses real money balances to measure the purchasing power of the stock of money; the money demand function is like the demand function for a particular good, i.e. the convenience of holding real money balances; 2 13/10/2015 Money demand function below shows that the quantity of real money balances demanded is proportional to real income; M P D kY There is an inverse relationship between V & k: M x V = P x Y if V=1/k This implies that when: (M/P)D is high, k is large, V is small: money changes hands less; OR, (M/P)D is low, k is small, V is large: money changes hands more. 3 13/10/2015 Velocity (V) & the QTM: M x V = P x Y If V, is assumed to be constant, QTM explains what determines nominal GDP; A change in M leads to a change in nominal GDP, thus, if V is fixed, the quantity of money determines the...
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...MACROECONOMICS NAME_____________ TEST 4 CHAPTERS 16,17,18,19 AND 20 Chapter 16 1) The idea of the ________ is that people make lifetime consumption plans. A) life-cycle theory of consumption B) invisible hand C) law of demand D) classical theory of investment ANSWER: ______________ 2) According to the life-cycle theory of consumption, people tend to consume ________ they earn during their early and later years. A) more than B) less than C) the same as D) an amount unrelated to what ANSWER: ______________ 3) The opportunity cost of leisure will rise if A) the wage rate increases. B) the wage rate decreases. C) nonlabor income increases. D) nonlabor income decreases. ANSWER: ______________ 4) A rise in the interest rate A) decreases the opportunity cost of consuming today. B) increases the opportunity cost of consuming in the future. C) increases the opportunity cost of consuming today. D) decreases the opportunity cost of consuming in the future. ANSWER: ______________ 5) Over time, spending on ________ is ʺsmootherʺ than spending on ________. A) durable goods; services B) nondurable goods; durable goods C) services; nondurable goods D) durable goods; service ANSWER: ______________ 6) The largest increase in the labor-force participation rate since 1950 is among A) prime-age men. B) teenagers over the age of 16. C) prime-age women. D) males in their 20s. ANSWER:...
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...ECON 1102: Week 7 Money, Private Banks and the RBA Read Chapter 7 1 Recap Week 6: Equation for PAE PAE C d I P G X C C cT c(1 t )Y Substitute PAE C cT I P G X c(1 t )Y Collect the exogenous variables PAE [C cT I P G X ] c(1 t )Y PAE [C cT I P G X ] c(1 t )Y 2 Recap Week 6: Short Run Equilibrium Equilibrium condition Y PAE Y [C cT I G X ] c(1 t )Y P Solve for equilibrium GDP Y [1 c(1 t )] [C cT I P G X ] Ye 1 [C cT I P G X ] [1 c(1 t )] 3 Recap Week 6: Keynesian model – recessionary gap . PAE (planned aggregate expenditure) PAE = Cd + IP + G + X 0 IP+ G + X IP + G IP Y* Y (= GDP) Starting at potential output (Y*), a fall in exogenous C, I, G, NX will lead to a recessionary gap 4 Recap Week 6: If we assume that the planned aggregate expenditure is given by the equation PAE = 960 + 0.8Y a 10-unit drop in exogenous expenditure would result in a _____________ in short-run equilibrium output. A. 50-unit decline B. 40-unit decline C. 950-unit decline D. 4-unit decline 5 Recap Week 6: Keynesian model – recessionary gap . PAE (planned aggregate expenditure) PAE = C + IP + G + NX 0 Ye Y* I P + G + NX IP + G IP Y (= GDP) Recessionary gap 6 Recap Week 6: Keynesian model – expansionary gap . PAE (planned aggregate expenditure) PAE = C + IP + G + NX I P + G...
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...(BBS) estimated GDP growth of 5.83% for the financial year 2009-10. MTMF consider a growth of 6 percentage due to positive trend in export earning, a rose in production of aman and boro, increase in agriculture and industrial credit and finally the growth of imports of capital machinery and industrial raw materials. We will examine how increase in broad agriculture and service sector and increase in sub sectors of industrial sector lead to a positive growth in GDP at current market price. (According to BER GDP at market price is estimated TK 47405 which is 11.21% higher than GDP per capita of FY 2008-09). Moreover with a table of average change in the GDP (both current and constant), change in Money Supply (M2) and the regression outputs with different variables, we will examine how Money supply (M2) have a positive correlation with real GDP and nominal GDP while inflation and nominal GDP have a strong positive correlation ....
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...Labour Law Managerial Monetary / Financial Natural resource Personnel Public / Welfare economics Regional Rural Urban Welfare Lists Economists Publications (journals) Portal icon Business and economics portal v t e In economics, inflation is a sustained increase in the general price level of goods and services in an economy over a period of time.[1] When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation reflects a reduction in the purchasing power per unit of money – a loss of real value in the medium of exchange and unit of account within the economy.[2][3] A chief measure of price inflation is the inflation rate, the annualized percentage change in a general price index (normally the consumer price index) over time.[4] Inflation's effects on an economy are various and can be simultaneously positive and negative. Negative effects of inflation include an increase in the opportunity cost of holding money, uncertainty over future inflation which may discourage...
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...What the CEO Wants You To Know Using Your Business Acumen to Understand How Your Company Really Works by Ram Charan Copyright © 2001 by Ram Charan. Published by arrangement with Crown Business, a division of Random House, Inc. 144 pages Focus Leadership & Mgt. Strategy Sales & Marketing Finance Human Resources IT, Production & Logistics Career Development Small Business Economics & Politics Industries Regions Concepts & Trends Take-Aways • Develop your "business acumen" by learning the essential forces that drive business. • The core of any business consists of customers, “cash generation, return on assets and growth.” • To prosper, your company must grow. Be sure it grows wisely. • Expanding sales must be accompanied by increases in other critical financial metrics. Otherwise, growth can cause bankruptcy. • Accompany growth with solid cash flow, steady speed and sensible margins. • Set no more than five clear priorities so the organization can focus. • Everyone from the sales force to the mailroom should understand cash flow. • Know your customers firsthand; don't rely on polls and surveys. • Seek employees who fit your culture and enable them to execute. Provide practical coaching and useful, specific feedback. • See the total picture. Understand all the forces at play and how they interrelate. Rating Overall (10 is best) Applicability Innovation Style 8 8 7 9 To purchase abstracts, personal subscriptions or corporate solutions, visit...
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...the Quantity Theory of Money Eric Mahaney 4/7/13 EC-301-1 The Fisher effect and the Fisher equation were made famous by economist Irving Fisher. He created his equation by rearranging the equation for real interest rate, which is (r = i - π). Real interest rate equals the nominal interest rate plus inflation. This is a very basic equation. Fisher manipulated it to solve for i, in order to understand the effect that inflation has on nominal interest rate. The famous equation is i = r + π, nominal interest rate equals real interest rate plus inflation. This is basically saying that the nominal interest rate can be changed by a change in either the real interest rate or inflation. The Fisher effect is the one to one relationship between the inflation rate and the nominal interest rate. According to this model, as inflation increases, the nominal interest rate should also increase by the same proportion. The main concept behind the Fisher effect is that higher inflation causes higher nominal interest rate. (Mankiw, 91-92) By using the Fisher effect along with the quantity theory of money, the effect that money growth has on nominal interest rate can also be analyzed. The quantity theory of money is M*V=P*Y or the quantity of money multiplied by the velocity of money equals price multiplied by output. The velocity of money is assumed to remain constant in order to simplify the model. Therefore, PY is determined solely by the quantity of money. PY represents nominal...
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...Question 1 a) (i) Money facilitates transactions of goods and service as a medium of exchange. (ii) Measurement of value; The value of various goods and services are expressed in terms of money such as $10 per meter, etc. having facilitated modern business and trade. (iii) Store of value; People can store surplus purchasing power and use it whenever they want. (iv) Money is the most liquid asset (Liquidity measures how easily assets can be spent to buy goods and services). B) The quantity equation is the quantity of money (M) times the velocity of circulation of money (V) equals to the dollar value (P) times the economy’s output of goods and services (Y)( M x V = P x Y). An increase in the quantity of money must be reflected in changes in one of the other three variables. This is a long run theory. The theory assumes that the velocity of money (V) and output (Y) are very stable over time. Money neutrality means that “the changes in the money supply do not affect real variables” (Gans, et al., 2012). The absolute price level is a nominal variable while relative prices are real variables. Plus a change in the price level only affects absolute prices and a change in the money supply (a nominal variable) can only affect other nominal variables (the price level) rather than real variables(production, employment etc). Therefore if the price level is low, the value of money is high, then people will demand to hold less money while if the price level is high, the value of money is low, then...
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