Money

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Macro economics Money

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Money

  1. 2. Definition <ul><li>Conceptual Definition </li></ul><ul><li>Money can be defined as any commodity that is generally accepted as a medium of exchange and a measure of value. </li></ul><ul><li>Four Categories </li></ul><ul><li>The Conventional Approach </li></ul><ul><li>The Chicago Approach </li></ul><ul><li>The Gurley-Show Approach </li></ul><ul><li>The Central Bank Approach </li></ul>
  2. 3. Functions of Money <ul><li>Money as a Medium of Exchange </li></ul><ul><li>Money as a Measure of Value </li></ul><ul><li>Money as a Store of Value </li></ul><ul><li>Money as a Standard of Deferred Payments </li></ul>
  3. 4. Kinds of Money <ul><li>Metallic Coins </li></ul><ul><li>Paper Money </li></ul><ul><li>Private Bank money </li></ul>
  4. 5. Supply of Money <ul><li>Sources of Money Supply </li></ul><ul><li>Measures of Money Supply </li></ul><ul><li>Theory of Money Supply </li></ul>
  5. 6. Sources of Money Supply <ul><li>Central Bank & High Power Money </li></ul><ul><li>Measure </li></ul><ul><li>H=C+R+OD </li></ul><ul><li>Where, </li></ul><ul><li>C= Currency Held by public </li></ul><ul><li>R= Cash Reserves of Commercial banks </li></ul><ul><li>OD= Other Deposits with RBI </li></ul>
  6. 7. Sources of Money Supply <ul><li>Money Creation by the Commercial Banks </li></ul><ul><li>Credit Money </li></ul><ul><ul><li>Primary Deposits </li></ul></ul><ul><ul><li>Secondary Deposits or Derivative Deposits </li></ul></ul>
  7. 8. Sources of Money Supply <ul><li>Deposit Multiplier </li></ul><ul><li>A function that describes the amount of money created in a bank's money supply. This money is created by lending money that is in excess of its required reserve to borrowers. </li></ul><ul><li>dm= 1/r </li></ul><ul><li>dm= ∆TD/ ∆D </li></ul><ul><li>dm= ∆TD/ ∆TR </li></ul>
  8. 9. Sources of Money Supply <ul><li>Credit Multiplier </li></ul><ul><li>Credit Multiplier can be defined as the ratio of additional credit creation to the total cash reserves. </li></ul><ul><li>Cm= ∆CC/ ∆R </li></ul><ul><li>Cm= ( ∆TD- ∆R)/ ∆R </li></ul><ul><li>Cm= (1-r)/r </li></ul>
  9. 10. Measures of Money Supply <ul><li>Purpose of measuring Money Supply </li></ul><ul><li>To control and regulate in accordance with monetary requirement of the country. </li></ul><ul><li>Excess money supply lead to inflation and shortage lead to economic recession </li></ul>
  10. 11. Measures of Money Supply <ul><li>Based on the medium of exchange and store of value functions of money, the RBI undertakes different measures of money supply. </li></ul><ul><li>They are M0, M1, M2, M3 and M4 from reserve, narrow to broader measures. </li></ul><ul><li>Among these measures of money supply, M0,M1 and M3 are the most important money supply measures. </li></ul>
  11. 12. Measures of Money Supply <ul><li>M0(Reserve Money) = Currency in Circulation + Banker’s Deposit with RBI + Other Deposits with RBI. </li></ul><ul><li>M1(Narrow Money) = Currency with the public + Demand Deposits with Banks + Other Deposits with the RBI. </li></ul><ul><li>M2 = M1 + Time Liabilities of the Saving Deposits with the banks + Certificate of Deposits issued by Banks + Term Deposits with Banks. </li></ul><ul><li>M3(Broad Money) = Currency with the Public + Demand Deposits with Banks + Time deposits with Banks + Other Deposits with RBI. </li></ul><ul><li>Or M3 = M1 + Time Deposits with Banks. </li></ul><ul><li>M4 = M3 + Total Post Office Deposits. </li></ul>
  12. 13. The Theory of Money Supply <ul><li>The theory of money supply makes a distinction between the two concepts of money supply </li></ul><ul><li>Ordinary Money or stock of money (M) </li></ul><ul><li>M = C + DD </li></ul><ul><li>High-Power Money (H) </li></ul><ul><li>H = C + R </li></ul>
  13. 14. The Theory of Money Supply <ul><li>The Money Multiplier </li></ul><ul><li>Money Multiplier gives the relationship between reserve money or high-power money and ordinary money or broad money or money stock. </li></ul><ul><li>Money Multiplier approach says that money stock is determined by the money multiplier and reserve money. </li></ul><ul><li>Money Multiplier is the rate at which high-power money gets multiplied to make supply of total ordinary money. </li></ul>
  14. 15. The Theory of Money Supply <ul><li>Money Multiplier (m) </li></ul><ul><li>M = mH </li></ul><ul><li>m = M/H </li></ul><ul><li>Money Multiplier with Demand Deposit (DD) </li></ul><ul><li>M = (cr+1)/(cr+rr) * H </li></ul><ul><li>m = (cr+1)/(cr+rr) </li></ul><ul><li>Money Multiplier with DD and TD </li></ul><ul><li>M = (1+cr)/(cr+rr(1+t)) * H </li></ul><ul><li>m = (1+cr)/(cr+rr(1+t)) </li></ul>
  15. 16. Theory of Money and Price <ul><li>The Classical Quantity Theory of Money </li></ul><ul><li>Fisher’s Quantity Theory of Money and Price Level. </li></ul><ul><ul><li>(or) Quantity theory of exchange </li></ul></ul><ul><ul><li>MV = ∑ pQ </li></ul></ul><ul><ul><li>MV = PT </li></ul></ul><ul><ul><li>Expanded Equation, </li></ul></ul><ul><ul><li>MV + M’V’ = PT </li></ul></ul>
  16. 17. Money Market Equilibrium <ul><li>Relationship between the demand for real balances and the interest rate. </li></ul>R MD/P MS/P E Interest Rates Real Money Balances
  17. 18. Money Market Equilibrium R MD/P MS/P Interest Rates Real Money Balances R BS R’ A B R’ B A BD
  18. 19. Money Market Equilibrium <ul><li>Changes in Equilibrium </li></ul><ul><ul><li>Changes in the Nominal Money Supply </li></ul></ul>R’ R MD/P MS/P E E’ Interest Rates Real Money Balances (MS/P)’
  19. 20. Money Market Equilibrium <ul><li>Changes in Equilibrium </li></ul><ul><li>Changes in Real Income </li></ul>R’ R MD/P MS/P E E’ Interest Rates Real Money Balances (MD/P)’
  20. 21. Theory of Money and Interest <ul><li>The Classical Theory of Interest </li></ul>R1 R2 Q1 Q2 I1 I2 E E’ S Interest Rates Savings and Investment O
  21. 22. Theory of Money and Interest <ul><li>Keynes’s Criticism of Classical Theory of Interest </li></ul>R3 Interest Rates Savings and Investment R2 R1 R0 M N T L I1 I2 I3 S1 S2 A B C D O
  22. 23. The Keynesian Theory of Interest

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