TOPIC 5 MACRO

• Money


  The set of assets in the economy that people regularly use to buy goods and services from other people
• Money


  Something that is universally accepted as a mode of exchange
• Money


  • Paper currency and coins
• Functions of money


  • Medium of exchange
  • Measure of value as a unit of account
  • Store of value or wealth
  • Tool for standard of deferred payment

  
• Characteristics of money


  • Acceptability
  • Stability
  • Durability
  • Uniformity
  • Divisibility
  • Portability
  • Recognition
  • Limited Supply
  • Non-counterfeitability
• Types of money


  • Commodity money
  • Fiat money
  • Legal tender
  • Token money
  • Quasi money / demand deposit
  • Digital currency
• Money demand


  The desire of households and businesses to hold assets in a form that can be easily exchanged for goods and services
• Purposes of money demand (Keynes' liquidity preference theory)

  • Transaction motive
  • Precautionary motive
  • Speculative motive

  
• Money demand curves


  • Lt+e - Demand curve for cash for transaction and precautionary motives
  • Ls - Demand curve for cash for speculative purposes
  • Dm - Market demand curve

  
• Money supply


  The total of all types of money in an economy
• Types of money supply

  • Narrow Money (M1)
  • Current Money (M2)
  • Broad Money (M3)
• Inflation


  Economic instability
• Deficit supply


  Cause depression and unemployment
• Types of money supply

  • Narrow Money (M1)
  • Current Money (M2)
  • Broad Money (M3)
• Narrow money (M1)


  Made up of money in circulation and chequeable deposits
• Narrow money (M1)


  1. Money in circulation is the total money withdrawn and circulated in the economy by the Central Bank

  2. Money in circulation consists of paper currency and coins

  3. Chequeable deposits are deposits made by private individuals and the public
• M1


  Coins+ Paper currency + Current deposits
• Current money (M2)


  • Includes less liquid assets
  • Consists of M1 and quasi money
• Quasi money


  • Savings and fixed accounts in commercial
  • Bank Negara Malaysia certificates
  • Negotiable bills
  • Repurchase agreement (REPO)
• M2


  M1 + Quasi money
• Broad money (M3)


  Consists of M2 and savings and fixed deposits in other financial institutions
• Other financial institutions


  Merchant banks, financial companies, discount houses and Islamic banks
• M3


  M2+Savings and fixed deposits in other financial institutions
• Irving Fisher's money supply theory

  • Any changes in the total money supply in an economy will produce the same rate of changes in the general price level
  • Changes in the money supply and the rate of inflation are also positively related
• Assumptions of Irving Fisher's theory

  • The economy is at the full employment level
  • Money is demanded for transaction purposes only
  • The velocity of circulation (V) and volume of transactions (T) are constant in the short term
  • The quantity of money, which is determined by outside forces, is the main influence of economic activity in a society
• Formula for Irving Fisher's theory

  MV = PT
• Money supply curve (Sm)


  Perfectly inelastic, as the supply of money in the economy is controlled by the Central Bank

  
• Money market equilibrium


  • Achieved when the money supply curve intersects with the money demand curve at a certain interest rate
  • Equilibrium interest rate is 0r0 and equilibrium money quantity is 0M0
  • Any change in the supply of money or demand for money or both will influence the interest rate and equilibrium money quantity

  
• Money market


  • A crucial financial market segment where short-term borrowing and lending of funds occur
  • Facilitates the smooth functioning of the economy by providing a platform for participants to meet their immediate cash needs and manage liquidity
• Participants in the money market

  • Governments
  • Corporations
  • Financial institutions
  • Individual investors
• Money market equilibrium


  Occurs when the money demand equals the money supply, at which point the equilibrium interest rate is formed

  
• Change in interest rate out of equilibrium

  Causes movement along the money demand curve, changing the quantity of money demanded

  
• Factors that shift the money supply


  • Required reserve ratio
  • Open market operations
  • Discount rate

  
• Required reserve ratio


  • A tool used by the Fed to control the money supply
  • A high reserve ratio leads to fewer loans generated, shifting the money supply curve to the left and increasing interest rates

  
• Open market operations


  • The Fed buying securities injects more money into the economy, shifting the money supply curve to the right and decreasing interest rates
  • The Fed selling securities reduces the money supply, shifting the curve to the left and increasing interest rates
• Discount rate


  • The rate at which commercial banks can borrow from the Federal Reserve Bank
  • An increase in the discount rate shifts the money supply curve to the left, increasing interest rates
  • A decrease in the discount rate shifts the curve to the right, decreasing interest rates
• Factors that shift the money demand


  • Price level
  • Real GDP
  • Technology
  • Changes in institutions
• Increase in price level


  Shifts the money demand curve to the right
• Increase in real GDP


  Shifts the money demand curve to the right
• Technological changes


  Influence the money demand curve by making it easier for individuals to change between money and savings