Lecture 7
(Chapter 29) •The monetary system •Insert lecturer’s name and contact here • •Starting up •OVERVIEW OF THIS WEEK’S TOPIC
–Money: functions, demand and supply –The money multiplication process –The RBA and its open market operations –Monetary policy of inflation targeting •The Meaning of Money •We all know how to spend it, but what is it really that we are spending? What is money? •Money is the set of assets in an economy that people regularly use to buy goods and services from other people. –Does a house qualify as money? –And cigarettes? –And those 10 ringgit left in your wallet since last year’s trip to KL? –And Telstra bonds/shares? •Is money just currency (cash)? –Common misperception –What about deposits on your account? And credit cards? •The functions of money •What are the main functions of money? –medium of exchange (means of payment) –unit of account –store of value •Which one is the most important? •Medium of exchange •An item that buyers give to sellers when they want to purchase goods and services. •A medium of exchange is anything that is readily acceptable as payment. •What if there was no money? •Double coincidence of wants: ‘The shivering baker needs to find a hungry tailor’ •Search cost •The functions of money •Unit of account –A unit of account is the yardstick people use to post prices and record debts. •Store of value –A store of value is an item that people can use to transfer purchasing power from the present to the future. •The Types of money •Commodity money takes the form of a commodity with intrinsic value. –Examples: gold, silver, cigarettes. •Fiat money is used as money because of government decree. –It does not have intrinsic value. –Examples: coins, currency, cheques, deposits –zero-coupon bond of infinite maturity •Money in the Australian economy •Currency is the plastic notes and metal coins in the hands of the public. •Current deposits are balances in bank accounts that depositors can access on demand by using a debit card or writing a cheque. •Monetary aggregates: narrow vs broad money •What is liquidity? •Monetary base (MB) •Money stock 代写Econ1010 The monetary system •Demand for Money •How much money does an individual ‘demand’? •What are the main determinants? –Transactions/income? –Wealth? –Speculation? –Inflation? –What is the velocity of money? •So what has driven the trend? – •The money supply •The money supply is the quantity of money available in the economy •Why is it important? •How is money supply determined? •Creation of supply money by the central bank AND the banking system
1.the RBA (monopolistically)
- Open market operations
2.Money stock (M1-M3) through interactions between the CB, commercial banks and the public and the ‘multiplication’ process
•Banks and the money supply
•Can banks also affect money supply?
•Influencing the quantity of demand deposits
•Reserves are deposits that banks have received but have not loaned out.
•Why do banks hold reserves?
–Required vs voluntary reserves
•In a fractional-reserve banking system, banks hold a fraction of the money deposited as reserves and lend out the rest
•Reserve ratio (R) is the fraction of deposits that banks hold as reserves
•Money creation with fractional-reserve banking
•What does this T-Account show?
•What reserve ratio
does it assume? •The money multiplication process
A loan => (money spent =>) bank deposit => the bank keeps a proportion of it as reserves => the rest constitutes another loan and so on... •The money multiplier •How much money is eventually created in this economy? •Money creation with fractional-reserve banking • •The money multiplier is the amount of money the banking system generates with each dollar of reserves •What is then the value of the money multiplier (m)? •The money multiplier is the reciprocal of the reserve ratio: M = 1/R
•With R = 20%, what is M? •What about the real world values? •M1 Multiplier in the US •Banks During the financial crisis •A common joke: ‘The problem with investment bank balance sheets is that on the left side nothing is right and on the right side nothing is left.’ • •To show the important concept of leverage let us add things to the T-accounts • •A More Realistic Leverage •The capital is the owners’ equity (part of their funding raised by issuing shares) •The leverage ratio = total assets/capital •What is the leverage ratio in this example? •What happens to capital if some people default on their loans or the securities go down in value (say by $120)? •Is the Multiplier Model Correct? No.
Is it Useful? Yes. •Above it is assumed that the initial step in the process of changing money supply is on the banks liabilities side –i.e. there is some change in deposits which will affect money supply. •But can this be the other way round? •Can this be that a bank decides to give a loan, creates electronic money out of nothing, and THEN creates a deposit to the loan’s recipient? •If so, can this be a problem? Why? When? •The Reserve Bank of Australia •The Reserve Bank of Australia (RBA) serves as the nation’s central bank since 1959 •Is the RBA ‘independent’ from the government? Why? •It has two main functions: –The formulation and administration of monetary policy. What is it? –What are the goals of monetary policy? –To maintain financial stability –Any others? •Organisation of the RBA •What is the Reserve Bank Board? –responsible for the Bank's monetary and banking policy. –How many members does it have and who are they? –How often and when does the board meet? –How are changes in the stance of monetary policy communicated? •Monetary policy in Australia •What is the monetary regime in Australia called? •When did monetary policy in Australia start pursuing an inflation target? •What is the horizon of the inflation target? •What does the explicit inflation target do? –Accountability –The inflation target also anchors private sector inflation expectations. –Credibility •The inflation forecast targeting regime •Is policy forward-looking? Why? •If inflation is forecast to be: –above the target, monetary policy has to be tightened to move inflation down
does it assume? •The money multiplication process
A loan => (money spent =>) bank deposit => the bank keeps a proportion of it as reserves => the rest constitutes another loan and so on... •The money multiplier •How much money is eventually created in this economy? •Money creation with fractional-reserve banking • •The money multiplier is the amount of money the banking system generates with each dollar of reserves •What is then the value of the money multiplier (m)? •The money multiplier is the reciprocal of the reserve ratio: M = 1/R
•With R = 20%, what is M? •What about the real world values? •M1 Multiplier in the US •Banks During the financial crisis •A common joke: ‘The problem with investment bank balance sheets is that on the left side nothing is right and on the right side nothing is left.’ • •To show the important concept of leverage let us add things to the T-accounts • •A More Realistic Leverage •The capital is the owners’ equity (part of their funding raised by issuing shares) •The leverage ratio = total assets/capital •What is the leverage ratio in this example? •What happens to capital if some people default on their loans or the securities go down in value (say by $120)? •Is the Multiplier Model Correct? No.
Is it Useful? Yes. •Above it is assumed that the initial step in the process of changing money supply is on the banks liabilities side –i.e. there is some change in deposits which will affect money supply. •But can this be the other way round? •Can this be that a bank decides to give a loan, creates electronic money out of nothing, and THEN creates a deposit to the loan’s recipient? •If so, can this be a problem? Why? When? •The Reserve Bank of Australia •The Reserve Bank of Australia (RBA) serves as the nation’s central bank since 1959 •Is the RBA ‘independent’ from the government? Why? •It has two main functions: –The formulation and administration of monetary policy. What is it? –What are the goals of monetary policy? –To maintain financial stability –Any others? •Organisation of the RBA •What is the Reserve Bank Board? –responsible for the Bank's monetary and banking policy. –How many members does it have and who are they? –How often and when does the board meet? –How are changes in the stance of monetary policy communicated? •Monetary policy in Australia •What is the monetary regime in Australia called? •When did monetary policy in Australia start pursuing an inflation target? •What is the horizon of the inflation target? •What does the explicit inflation target do? –Accountability –The inflation target also anchors private sector inflation expectations. –Credibility •The inflation forecast targeting regime •Is policy forward-looking? Why? •If inflation is forecast to be: –above the target, monetary policy has to be tightened to move inflation down
•contractionary policy
–below the target, monetary policy should be eased
•expansionary policy
•The inflation targeting regime
•What is the cash rate?
–The cash rate is the interest rate that financial institutions can earn on overnight loans of their currency or reserves (the short-term money market which financial institutions operate in).
•The inflation targeting regime
•The RBA now targets the cash rate (as its instrument) as a means of influencing the inflation rate.
•When the cash rate rises, interest rates in the retail market rise. Likewise when the cash rate falls, interest rates fall.
–The next slide (new) has a demonstration
–Topical issue: banks not passing on the cash rate reduction
•As changes in the cash rate flow through to interest rates, generally economic activity is affected
•
•How does the Reserve Bank affect the cash rate?
•open market operations
–purchasing or selling Australian government securities
•To increase the amount of cash in the economy, the RBA buys government securities from financial institutions.
–Injecting cash into money markets
–What then happens to the money supply?
•To decrease the money supply, the RBA sells government securities to financial institutions.
–withdrawing cash from the system
•The cash rate
•Problems in affecting the economy
•The RBA has been able to control movements in the cash rate and thereby influence the cash market but its ability to control the money supply is not precise.
•The RBA must wrestle with two problems that arise due to fractional-reserve banking
•The RBA does not control the amount of money that households choose to hold as deposits in banks.
•The RBA does not control the amount of money that bankers choose to lend.
•Summary
•The term money refers to assets that people regularly use to buy goods and services.
•Money serves three functions in an economy: as a medium of exchange, as a unit of account, and as a store of value.
•Commodity money is money that has intrinsic value.
•Fiat money is money without intrinsic value. The Reserve Bank of Australia has control of monetary policy in Australia.
•The RBA uses open market operations to achieve a desired cash rate outcome.
•Summary
•When banks loan out some of their deposits, they increase the quantity of money in the economy.
•Because the RBA cannot control the amount bankers choose to lend or the amount households choose to deposit in banks, the RBA’s control of the money supply is imperfect.
代写Econ1010 The monetary system
如果您有论文代写需求，可以通过下面的方式联系我们
点击联系客服
15012858052
153688106
