Ma II.pptx

Wallaggaa
Gimbi campus
Faculty of Business
and Economics
University
Department of
Economics
Macroeconomics -II
By Lemi Jeneral (MSc)

Introduction
 In the long run consumption decision is
important in its role in economic growth. In
the growth models, particularly in Solow
growth model, we know that saving rate is
the key determinant of steady state capital
stock and thus of the economic well being
 In the short run analysis consumption decision
is crucial in its role in determining aggregated
demand. Fluctuations in consumption are a
main element of booms and recessions, i.e. it
can be a shock to the economy.
Chapter-1:- Theory Of Consumption

Keynes Consumption Function
Keynes made the consumption function central
to his theory of economic fluctuations. Keynes
made his conjectures about the consumption
function based on introspection and casual
empiricism. The three conjectures of Keynes are:
 The marginal propensity to consume - the
amount consumed out of the additional dollar
of income -is between zero and one. This
conjecture is based on the fundamental
psychological law.
C = a +bYD , a  0, 0  b  1
Cont.….

The ratio of consumption to income, called the
average propensity to consume falls as income
increases. According to Keynes saving was a
luxury, so he expected the rich to save a higher
proportion their income than the poor.
Income is the primary determinant of
consumption, and interest rate does not have
an important role. This conjecture was in
sharp contrast to the belief of the classical
economists who held the view that a higher
interest rate encourages saving and discourage
consumption
Cont.…

Earlier studies to test Keynes’s conjectures indicated
that Keynesian consumption function is a good
approximation of how consumer behaves. Household
data on consumption and income supported the three
conjectures of Keynes. Although the Keynesian
consumption function met early successes, two
anomalies soon arose. Both concern Keynes’s conjecture
that the average propensity to consume fall as income
rises.
Secular Stagnation:-a long depression of indefinite
duration unless fiscal policy was used to expand
aggregate demand. How ever, in the period of high
income, these higher incomes did not lead to large
increase in the rate of saving. Therefore, Keynes’s
conjecture that the average propensity to consume would
fall as income rose appeared not to hold.
Cont.…

The second anomaly become in to existence when economist
Simon Kuznets constructed new aggregate data on
consumption and income. He discovered that the ratio of
consumption to income is fairly constant from decade to
decade; despite of large increase in income over the period.
Again, Keynes’s conjecture that the average propensity to
consume would fall as income rose did not hold. Kuznets also
indicates that average propensity to save is fairly constant
over long period.
The consumption puzzle:-Studies of household data and short
time series found a relationship between consumption and
income similar to Keynes. But studies of long time series found
that the average propensity to consume did not vary
systematically with income. This relationship is called long run
consumption function which has a constant average propensity
to consume
Cont.…

1.3. Intertemporal Choice
The economist Irving Fisher developed the model with
which economists analyze how rational, forward looking
consumers make intertemporal choices - that is, choices
involving different periods of time. Fisher’s model
illuminates the constraints consumers face, the
preferences they have, and how these constraints and
preferences together determine their choices about
consumption and saving.
The Intertemporal Budget Constraint
Majority would prefer to increase the quantity or quality
of the goods and services they consume. The reason
people consume less than they desire is that their
consumption is constrained by their income. In other
words, consumers face a limit on how much they can
spend - budget constraint.
Cont.…

To keep things simple, we examine the decision facing a
consumer who lives for two periods.
Period one represents the consumer’s youth and period
two represents the consumer’s old age.
The consumer earns income Y1 and consumes C1 in
period one, and earns income Y2 and consumes C2 in
period two. (All variables are real i.e., adjusted for
inflation). Because the consumer has the opportunity to
borrow and save, consumption in any single period can
be either greater or less than income in the period.
Consider how the consumer’s income in the two periods
constrains consumption in the two periods. In the first
period, saving equals income minus consumption. That is,
S = Y1 – C1
Where S is saving.
Cont.…

In the second period, consumption equals the accumulated
saving, including the interest earned on the saving, plus
second period income.
That is, C2 = (1+r) S + Y2 where r is the real interest.
To derive the consumer’s budget constraint, combine the two
equations above. Substitute the first equation for S into the
second equation to obtain
C2 = (1 +r) (Y1—C1) +Y2
To make the equation easier to interpret, we must rearrange
terms. To place all the consumption terms together, bring (1
+ r) C, from the right- hand side to the left-hand side the
equation to obtain
(1+ r) C1 + C2 = (1+r) Y1+Y2
Now divide both sides by 1+ r to obtain: C1 + C2 = Y1 + Y2
Cont.…

Consumer Preferences
The consumer’s preferences regarding consumption in the
two periods can be represented by indifference curves.
An indifference curve shows the combinations of first
period and second period consumption that make the
consumer equally satisfied.
The slope at any point on the indifference curve shows
how much second period consumption the consumer
requires in order to be compensated for a 1 unit
reduction in first period consumption.
This slope is the marginal rate of substitution between
first period consumption and second period consumption.
It tells us the rate at which the consumer is willing to
substitute second period consumption for first period
consumption.
Cont.…

Consumer Preferences
Having discussed the consumer’s budget constraint and
preferences, we can consider the decision about
consumption.
The consumer would like to end up with the best possible
combination of consumption in the two periods, on the
highest possible indifference curve. But the budget
constraint requires that the consumer also end up on or
below the budget line, because the budget line measures
the total resources available to him.
The impact of an increase in the real interest rate on
consumption can be decomposed into two effects: an
income effect and a substitution effect.
Cont.…

The income effect is the change in consumption that
results from the movement to a higher indifference
curve.
The substitution effect is the change in consumption that
results from the change in the relative price of
consumption in the two periods. In particular,
consumption in period two becomes less expensive
relative to consumption in period one when the interest
rate rises.
The consumer’ choice depends on both the income effect
and the substitution effect. Both effects act to increase
the amount of second period consumption; hence, we can
confidently conclude that an increase in the real interest
rate raises second period consumption.
Cont.…

1.4 Life cycle Hypothesis
Modigliani, who developed the life cycle hypotheses
model, emphasized that income varies systematically
over people’s lives and that saving allows consumers to
move income from those times in life when income is
high to those times when it is low.
The Hypothesis
One important reason that income varies over a person’s
life is retirement. Most people plan to stop working at
about age 65, and they expect their in comes to fall
when they retire. Yet they do not want a large drop in
their standard of living, as measured by their
consumption. To maintain consumption after retirement,
people must save during their working years
Cont.…

Considered a consumer who expects to live another T
years, has wealth of W, and expects to earn income Y
until she retires R years form now.
The consumer’s lifetime resources are composed of initial
wealth W and life time earnings of R.Y. (For simplicity,
we are assuming an interest rate of zero; The consumer
can divide up her lifetime resources among her T
remaining years of life. We assume that she wishes to
achieve the smoothest possible path of consumption over
her lifetime. There fore, she divides this total of W+RY
equally among the T years and each year consumes.
C = (W + RY)/T.
Cont.…

We can write this person’s consumption function as
C = (1/T)W + (R/T)Y
For example, if the consumer expects to live for 50 more
years and work for 30 of them, then T= 50 and R= 30, so
her consumption function is
C = 0.002W + 0.6Y
This equation says that the consumption depends on both
income and wealth. An extra birr1 of income per year raises
consumption by birr 0.60 per year, and an extra birr1 of
wealth raises consumption by $0.02 per year.
This life cycle model of consumer behavior can solve the
consumption puzzle. According to the life cycle consumption
function, the average propensity to consume is
C/Y = (W/Y) + β
Cont.…

1.5. The Permanent Income Hypothesis
Friedman’s permanent income hypothesis complements Modigliani’s life
cycle hypothesis: both use Irving Fisher’s theory of the consumer to argue
that consumption should not depend on current income alone. But
unlike the life cycle hypothesis, which emphasizes that income follows a
regular pattern over a person’s life time, the permanent income
hypothesis emphasizes that people experience random and temporary
changes in their incomes from year to year.
The Hypothesis
Friedman suggested that we view current income Y as the sum of two
components, permanent income YP and transitory income YT. That is,
Y=YP + YT
Permanent income is the part of income that people expect to persist
into the future.
Transitory income is the part of income that people do not expect to
persist. But differently, permanent income is average income, and
transitory in come is the random deviation from the average.
Cont.…

Friedman says, consumption should depend primarily on
permanent income, because consumers use saving and
borrowing to smooth consumption in response to transitory
changes in income.
The permanent income hypothesis, as expressed by this
equation, states that consumption is proportional to
permanent income.
Implications
The permanent income hypothesis solves the consumption
puzzle by suggesting that the standard Keynesian consumption
function uses the wrong variable. According to the permanent
income hypothesis, consumption depends on permanent
income; yet many studies of the consumption function try to
relate consumption to current income. Friedman argued that
this errors-in-variables problem explains the seemingly
contradictory findings.
Cont.…

Let’s see what Friedman’s hypothesis implies for the
average propensity to consume. Divide both sides of his
consumption function by Y to obtain
APC = C/Y = YP/Y
According to the permanent income hypothesis, the
average propensity to consume depends on the ratio of
permanent income to current income.
Cont.…

1.6 The Relative Income
An alternative to the absolute income hypothesis was
developed initially by Professor James S: Duesenberry of
Harvard University, a former member of the president’s
council of economic advises.
The Hypothesis
This approach does not depend on changes in the value
of parameters to account for the long term stability of
the C/Y ratio. It is based on two ideas:
First, consumer preferences are interdependent
Second, consumer spending does not depend on the level
of current income alone, as the absolute income
hypothesis views it, but on a relationship between
current income and the highest income that the family
or household has previously experienced.
Cont.…

Second idea means that consumption spending is
influenced by previous peak income as well as current
income.
The relative income hypothesis holds that the average
propensity to consume for the economy as a whole will
not change as long as the distribution of income does not
change.
During the period when the economy is moving toward a
new peak income level, there is no reason that the
pattern of income distribution should change. All
spending units will enjoy a higher absolute level of income
because the income level of the whole economy has risen,
but the relative position of each group will not necessarily
change.
Cont.…

2.1 Introduction
Investment is defined as the action of putting
some thing in to some venture in expectation of
some returns; or alternatively it is the formation
of real capital, tangible or intangible, that will
produced a stream of goods and services in the
futures.
2.2 Types of Investment
Investment in the national income accounts
includes:
 Business fixed investment
 Residential business investment
 Changes in business inventories
Chapter – 2: Investment

However, there are other type investments
which are not included in the national income
accounts.
These are investment in human capital and
financial investment.
Investment can be undertaken not only by
firms but also by households and government.
Cont.…

2.2.1 Business Fixed Investment (BFI)
The term “business” means that the investment
goods are bought by firms for future production. The
term “fixed” means that this spending is for capital
that will remain fixed for a while, as opposed to
inventory investment, which will be used or sold
shortly later.
Business fixed investment includes machines,
factories computers and cars used for the
production of outputs. Business fixed
investment is important in two respects.
First, investment spending is a significant
component of aggregate demand.
Cont.…

The second important macroeconomic role for
business fixed investment follows form the fact that
the net fixed business investment measures the
amount by which the stock of capital increased in
each period that is:
Kt - Kt - 1 = In t ---------------- (2.0)
Where kt is the capital stock and In t is net fixed
investment. Business fixed investment is therefore
important in the process of long run economic
growth. The theories developed to explain the
business fixed investment are:
 The accelerator theory and
 The neoclassical theory of Business fixed
investment.
Cont.…

A.The Accelerator Theory of Business Fixed
Investment
This theory also stated that in order to produce output
firms need capital.
Firms have some desired stock of capital to produce any
given amount of output.
If the desired stock of capital differ form what firms
actually have, then they must change their capital stock;
and how much they change is investment.
The desired stock of capital depends upon level output.
Higher level of output lead firms to demand a large stock
of capital, one of the factors used to produce output.
This theory can be stated algebraically:
Kt
d = αYt--------------------------------- (2.1)
Theories of BFI of Investment

where α > 0, Kt
d is the desired capital stock of the firm
at time t, is the descried capital to output ratio, y is the
out put produced at time t. In the simplest form of the
accelerator model, net investment is equal to the
difference between the desired capital stock and the
stock of capital inherited from the preceding period. If
we ignore deprecation of the existing capital stock, we
have
In t = Kt
d - K t-1 -------------------- (2.2)
This stock of capital inherited from the last
period will be the desired capital stock based on
output in the last period:
K t-1 = Kt
d = αYt-1 ------------------(2.3)
Cont.…

Therefore, the net investment equation can be written as
In t = Kt
d - K t-1 = αYt - αYt-1 = α(Yt - Yt-1)------(2.4)
In t = α ΔYt
This equation indicates that investment depends on the
rate of change of output ratio.
If this ratio is 5 every one dollar change in the rate of
growth in output (ΔY) will cause a 5 dollar change in
investment. Investment would then be expected to exhibit
considerate instability over the business cycle.
Cont.…
t
d
t
y
k

 ------------------------------------------------ (2.5)

Therefore, the simple accelerator model needs
considerable modification to explain investment in the
real world. The first modification makes the accelerator
model more realistic is to allow for laps in the
adjustment of the actual capital stock to desired capital
stock. As we assume:
The period to which we apply the model is a year
Because of an increase in output, there is an increase
in the desired capital stock.
Investment projects will be planned to eliminate the
desired capital stock.
In additional to the direct cost of the investment
projects, there will be adjustment costs, which will rise
quickly as the rate of investment increase.
Cont.…

To reflect this adjustment lag, equation (2.2) can be
rewritten as follow:
I n t= λ (Kt
d - K t-1), 0 < λ <1------------- (2.6 )
Using equation (2.1), we have
I nt. = λ (αYt - Kt-1) ----------------------- (2.7)
Where, because the actual capital stock is not equated to
the desired capital stock in each period, Kt-1 will not
generally equal to the desired capital stock in each
period, kt-1 will not general equally equal to Kd
t- 1.
Although investment is volatile, it is not as volatile as the
simple accelerator model predicts in the flexible
accelerator model. The flexible accelerator model can also
be modified to allow for variations in the speed with
which investment in undertaken to fill the gap between
the desired and actual capital stock (the λ parameter).
Cont.…

This is the choice variable to the firm and may be
influenced by credit conditions, including the interest
rate, tax consideration and other variables. For instance,
we would expect keeping, other things constant, less
investment when the interest rate is high.
Cont.…

B. The Neo-Classical Theory of Business Fixed Investment.
The flexible version of the accelerator theory of
investment assumes that the desired stock of
capital is a fixed multiple of output Kd = αY.
The neo-classical theory of investment looks
investment decisions as being affected by output,
as with the accelerator model, but on the basis
of cost benefit decisions. That is, firms may have
a desired output level they wish to produce,
given the price at which the output can be sold,
but the bundle of inputs they use will depend on
their relative costs and benefits so as to
maximize the profit.
Cont.…

The neo-classical theory of Business fixed Investment can
be stated formally as follow: the quantity of output
produced by the firm is a function of capital and labor
inputs algebraically:
Y = f (K, L) ------------------------------- (2.8)
The key assumption underlying this model is that firms
act in the way that maximizes their profit. If firms
maximize profit by hiring labor and capital, then the
amount they choose to hire will satisfy the condition
marginal benefit is equal to marginal cost of each factors
or their marginal revenue product (MRP) equals their
cost.
The cost of using capital R can be explicit if capital is
rented form another firm or implicit cost, which is the
cost of using the purchased capital over the period of
production.
Cont.…

Given our assumptions capital and labor are employed to
the point where the marginal revenue of labor is equal to
the marginal price of labor.
P.MPL = W -------------------------------- (2.9)
and the marginal revenue of capital is equal to the rental
cost of capital:
P.MPK = R ------------------------------- (2.10)
In deciding on its desired capital stock, the firms
compares the marginal productivity of additional unit of
capital with the user cost of capital, the cost to the firm
of employing an additional unit of capital for one period.
er the period of production.
Cont.…

I. Marginal Cost of Using Capital
The real cost of capital is not just the price of capital but is
instead fraction of this relating to the period over which the
capital is used, which we called it the real rental cost, R/P,
where P is the price of unit of output produced by the firm.
This cost of capital is consists of the following items:
A. Forgone Interest Income or Opportunity Cost of
Investment
The interest rate represents the opportunity cost of the
investment projects, because alternatively the firm could
invest its funds externally and earn interest rate.
In either case the interest is an element of cost of capital.
So far we have assumed that investment depends on the nominal
interest rate which is observed in the market. If inflation, the rise in
the price of capital, is expected, however, we must distinguish
between the nominal interest rate (r) and the real interest rate,
(phi) which defined as the nominal interest rate minus the expected
rate of inflation (pe).
Cont.…

That is
ф = r - pe ----------------------------- (2.11)
It is the real interest rate on which the level of
investment depends. If the nominal interest rate and the
expected rate of inflation are equal, the real borrowing
costs would be zero. The cost of capital interns of interest
rate is therefore,
Cost of Capital = ф Pk -------------------- (2:12)
Where Pk is the purchase of capital. This equation in fact
gives us the fraction of the actual purchase price of the
capital which is relevant for the period for which it is
used to produce goods.
B. Valuation Losses or Gains
The price of capital (Pk) may increase or decrease in response
to the changes in economic condition of one’s economy and the
world economy. This cost gain or loss can be represented
algebraically as;
Cost Gain or Loss = ∆Pk -------------------- (2:13).
Cont.…

C. Depreciation Rate
An additional element of the user cot of capital is the
depreciation rate. A certain proportion, δ (delta) of the
capital stock is used up (worn out) in the production
process during each period, and this depreciation is a
cost to the firm of using capital goods. This implies that
the depreciation cost is mathematically presented as:
Depreciation Cost = δ Pk -------------------- (2.14)
The total cost of capital, therefore, is determined as;
Total Cost of Capital = ф Pk + δ Pk ----------- (2.15)
= Pk (ф + δ)
This equation state that the cost of capital
depend on the price of capital, the real interest
rate and the rate of depreciation.
Cont.…

The real cost of capital – the cost of using a unit of
capital (purchased/ rented out capital) measured in units
of the economy’s output is expressed as;
Real cost of capital = (Pk/p) (ф + δ) ----------- (2:16)
where P is the aggregate price level in the economy. This
equation, equation (2:15) tells us that the real cost of
capital depend on the relative price of the capital good
(Pk/p), the interest rate ( ) and the depreciation rate.
Cont.…

II Marginal Benefit of Using Capital
The real benefit of using capital is given by
additional output produced by extra one unit of
capital, which is called the marginal product of
capital, MPk.
MPk = ΔY/ΔK = Δf (K, L)/ ΔK -------- (2.17)
It is assumed that factors of production exhibit
diminishing marginal returns.
We will use this fact or assumption here to
understand the marginal benefit of using capital.
The three factors that can influence the marginal
benefit of using capital:
Cont.…

a. Stock of capital –the higher the stock of capital, the
lower the marginal product of capital.
b.Quantity of labor used- the higher the quantity of
labor used, the higher the marginal product of capital.
c.State of production Technology- if the type of
technology used in the production process is an
advanced one, it will enable the firm to produce more
output from a given combination of factors.
Cont.…

The Determination of Investment
We are in a position to consider how firms
decide whether to increase or decrease its capital
stock. For each capital stock the firm earns
benefit which is measured by the marginal
product of capital (MPk .P) and incurs a cost,
which is equal to the product of relative price of
capital and interest, plus the depreciation rate.
Therefore, the profit rate t is given as:
Profit Rate = MRK – (Pk/P) (ф + δ) ---- (2.18)
The rental firm makes a profit if the marginal revenue of
capital is greater than the marginal cost of capital. It
incurs a loss if the marginal revenue of capital is less
than the marginal cost of capital.
Cont.…

The firms decision regarding its capital stock - that is
weather to add to its capital stock or to let is depreciate
depends on whether using and owning capital is
profitable or not. If the marginal revenue of capital
exceeds the cost of capital, firms find if profitable to add
do their capital stocks. If the marginal revenue of capital
falls short of the cost of capital, they let their capital
stock shrink. For a firm that uses and owns capital the
benefit of extra unit of capital is the marginal revenue of
capital that exceeds the cost of capital. Thus we can
write the change in capital i.e. the net investment as:
ΔK = I n [MRK –(Pk/P) (ф + δ)] -------------- (2:19)
Total spending on business fixed investment is that sum
of net investment and the replacement of depreciated
capital. The investment function is = MPK.P – (Pk/P) (ф
+ δ) I = I n [MRK –(Pk/P) (ф + δ) + δK] --------- (2.20)
Cont.…

This requisition implies business fixed investment depends
on the marginal revenue of capital, the cost of capital
and the amount of depreciation.
This model shows why investment depends on the
interest rate. An increase in the real interest rate raises
the cost of capital. It therefore reduces the amount of
profit and reduces the incentive to accumulate more
capital. Similarly a decrease in the real interest rate
reduces the cost of capital and stimulates investment.
The amount of investment depend on whether or not
firms are using and owning the optimal amount of
capital, that is whether or not the profit rate is zero or
not. In the long-run equilibrium, with profit equal to
zero, the amount of net investment zero with gross
investment being positive and just offsetting the amount
of depreciated capital each period.
Cont.…

IV. Effects of Tax on Investment
There are different types of tax policies that affect investment.
These include:
Taxes on Income Earned form Owning/ Using Capital
(Corporate Income Taxes):-This is simply the company tax An
increase in the company tax will effectively increase the tax
rate and hence decrease investment.
Investment Tax Credits:-This is a policy where by firm’s tax
liabilities are reduced by how much they spend on new capital
during a year. The investment tax credits (τ) are subsidies for
investment purchases.
Tax Treatment of Depreciation:-Corporate profits are taxed
and profits are just revenue minus costs. But deprecation
is calculated using historical cost, not replacement cost
which tends to understate the real cost of depreciation in
periods of high inflation, and overstates the profits being
Cont.…

V. The Stock Market and Investment
A The stock market:- The term stock refers to the shares
in the ownership of corporations, and the stock market
is the market in which these shares are traded.
Stock prices tend to be high when firms have many
opportunities for profitable investment, since these
profits opportunities mean higher future income for the
shareholders. Thus, stock prices reflect the incentives to
invest. firms base their investment decisions on the
following ratio, which is called Tobin’s q:
Cont.…
q =
edCapital
tofInstall
placement
l
lledCapita
iceofinsta
Market
cos
Re
Pr

The numerator of Tobin’s q is the value of the economy’s
capital as determined by the stock market. The
denominator is the price of the capital if it were
purchased today. Tobin reasoned that net investment
should depend on whether q is greater or less than one. If
q is greater than one, then the stock market values
installed capital at more than its replacement cost.
The advantage of Tobin’s q as a measure of
incentive to invest is that it reflects the expected
future profitability of capital as well as current
profitability.
Tobin’s theory provides a simple way
interpreting the role of the stock market in the
economy.
Cont.…

Another type of investment which is included in the
national income accounting and involving large
expenditure is the residential investment.
I. The Neoclassical Model of Residential Investment
Residential investment includes the purchase of new
housing both by people who plan to live in it themselves
and by people who plan to live in it themselves and by
landlords who plan to live in it themselves and by
landlords who plan to rent it others.
The neoclassical model of residential investment has two
parts. First it considers the existing stock of houses
(capital) as stock variable or a fixed variable, which
determines the equilibrium housing price second, it
considers investment, which is by the equilibrium housing
price, as a flow variable.
2.2.2 Residential Investment

Cont.….
a. The Stoke Equilibrium and Flow of Investment
At any point in time the stock or supply of houses is
fixed. We represent this stock with a vertical supply
curve. The demand curve for houses slopes downward,
because given a fixed population the demand for housing
increase.
The relative price of housing is expressed as:
Relative Price of = PH/p -------------------- (2.22)
Where PH is the price of house and p is the aggregate
price level. The price of housing adjusts to equilibrate the
supply and demand of housing. The following figures
shows this

Figure 2.3 the Demand and Supply of Housing
Cont.….

The determination of residential investment: the relative
price of housing adjusts to equilibrate supply and demand
for housing.
The relative price then determines the flow of new
housing. The higher the relative price of housing, the
incentive to build houses and the more houses are built.
B. Charge in Housing Demand and Flow of Investment.
Demand curve for housing can shift due to following
reasons:
Economic boom that increase national income
Increase in a country’s population either because of
higher immigration
Decline in interest rate increase housing demand
Tax deductibility of interest payments increase benefit
from owing housing demand.
Cont.….

* 2.2.3 Inventory Investment
It is not as such large enough compared to the other
forms investment. However, there is a strong relationship
between changes in investor investment and change in
out put over the business cycle.
. Reasons for Holding Inventories:- Knowing reasons for
holding inventories will help us understand better the
factors which influence the level of inventory investment
there are four reasons for holding inventories:

* Cont.…
a. Production Smoothing :-
b. Factors of Production:-
c. Stock – out Avoidance:-
d. Work in Process:-

Chapter 3: Money Demand And Money Supply
Money
a store of value
a unit of account
a medium of exchange

3.1. Money Supply and Monetary Expansion Mechanism
supply of money paper money
coins
demand deposits:-
The supply of money
Friedman
is the number of dollars people are carrying
around in their pockets, the number of dollars they have to their
credit at banks or dollars they have to their credit at banks in the
form of demand deposits, and also commercial bank time deposits.”
Time deposits are fixed rate of interest varying with the time period
for which the amount is deposited

Ma II.pptx

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