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29 The Monetary System
THE MEANING OF MONEY ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
The Functions of Money ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
The Kinds of Money ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
BANKS AND THE MONEY SUPPLY ,[object Object],[object Object],[object Object],[object Object]
Money Creation with Fractional-Reserve Banking ,[object Object],[object Object],[object Object],[object Object],[object Object]
Money Creation with Fractional-Reserve Banking ,[object Object],[object Object],[object Object],[object Object],[object Object],Assets Liabilities First National Bank Reserves $10.00 Loans $90.00 Deposits $100.00 Total Assets $100.00 Total Liabilities $100.00
Money Creation with Fractional-Reserve Banking ,[object Object],[object Object],[object Object],[object Object],[object Object]
The Money Multiplier  Assets Liabilities Second National Bank Reserves $9.00 Loans $81.00 Deposits $90.00 Total Assets $90.00 Total Liabilities $90.00 Money Supply = $190.00! Assets Liabilities First National Bank Reserves $10.00 Loans $90.00 Deposits $100.00 Total Assets $100.00 Total Liabilities $100.00
The Money Multiplier ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
The Fed’s Tools of Monetary Control ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
The Fed’s Tools of Monetary Control ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
[object Object],[object Object]
The Meaning of Money ,[object Object],[object Object],[object Object],[object Object],[object Object]
THE CLASSICAL THEORY OF INFLATION ,[object Object],[object Object],[object Object]
Figure 1 Money Supply, Money Demand, and the Equilibrium Price Level Copyright © 2004  South-Western Quantity of Money Value of Money,  1 / P Price  Level,  P 0 1 (Low) (High) (High) (Low) 1 / 2 1 / 4 3 / 4 1 1.33 2 4 Quantity fixed by the Fed Money supply Equilibrium value of money Equilibrium price level Money demand A
Figure 2 The Effects of Monetary Injection Copyright © 2004  South-Western Quantity of Money Value of Money,  1 / P Price  Level, P 0 1 (Low) (High) (High) (Low) 1 / 2 1 / 4 3 / 4 1 1.33 2 4 Money demand M 1 MS 1 M 2 MS 2 2. . . . decreases the value of money y . . . 3.  . . . and increases the price level. 1. An increase in the money supply . . . A B
THE CLASSICAL THEORY OF INFLATION ,[object Object],[object Object],[object Object],[object Object]
The Classical Dichotomy and Monetary Neutrality ,[object Object],[object Object],[object Object],[object Object],[object Object]
The Classical Dichotomy and Monetary Neutrality ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Velocity and the Quantity Equation ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Figure 3 Nominal GDP, the Quantity of Money, and the Velocity of Money Copyright © 2004  South-Western Indexes (1960 = 100) 2,000 1,000 500 0 1,500 1960 1965 1970 1975 1980 1985 1990 1995 2000 Nominal GDP Velocity M2
Velocity and the Quantity Equation ,[object Object],[object Object],[object Object],[object Object]
The Inflation Tax ,[object Object],[object Object],[object Object]
The Fisher Effect & Cost of Inflation ,[object Object],[object Object],[object Object],[object Object],[object Object]
THE COSTS OF INFLATION ,[object Object],[object Object],[object Object],[object Object],[object Object]
Menu Costs ,[object Object],[object Object],[object Object],[object Object],[object Object]
Inflation-Induced Tax Distortion ,[object Object],[object Object],[object Object],[object Object]
Table 1 How Inflation Raises the Tax Burden on Saving Copyright©2004  South-Western
Confusion and Inconvenience ,[object Object],[object Object],[object Object]
A Special Cost of Unexpected Inflation: Arbitrary Redistribution of Wealth ,[object Object],[object Object]

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Monetary Systems

  • 2.
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  • 4.
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  • 6.
  • 7.
  • 8.
  • 9. The Money Multiplier Assets Liabilities Second National Bank Reserves $9.00 Loans $81.00 Deposits $90.00 Total Assets $90.00 Total Liabilities $90.00 Money Supply = $190.00! Assets Liabilities First National Bank Reserves $10.00 Loans $90.00 Deposits $100.00 Total Assets $100.00 Total Liabilities $100.00
  • 10.
  • 11.
  • 12.
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  • 15.
  • 16. Figure 1 Money Supply, Money Demand, and the Equilibrium Price Level Copyright © 2004 South-Western Quantity of Money Value of Money, 1 / P Price Level, P 0 1 (Low) (High) (High) (Low) 1 / 2 1 / 4 3 / 4 1 1.33 2 4 Quantity fixed by the Fed Money supply Equilibrium value of money Equilibrium price level Money demand A
  • 17. Figure 2 The Effects of Monetary Injection Copyright © 2004 South-Western Quantity of Money Value of Money, 1 / P Price Level, P 0 1 (Low) (High) (High) (Low) 1 / 2 1 / 4 3 / 4 1 1.33 2 4 Money demand M 1 MS 1 M 2 MS 2 2. . . . decreases the value of money y . . . 3. . . . and increases the price level. 1. An increase in the money supply . . . A B
  • 18.
  • 19.
  • 20.
  • 21.
  • 22. Figure 3 Nominal GDP, the Quantity of Money, and the Velocity of Money Copyright © 2004 South-Western Indexes (1960 = 100) 2,000 1,000 500 0 1,500 1960 1965 1970 1975 1980 1985 1990 1995 2000 Nominal GDP Velocity M2
  • 23.
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  • 29. Table 1 How Inflation Raises the Tax Burden on Saving Copyright©2004 South-Western
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  • 31.