27. Money market: demand for money and supply of money. Money multiplier. Equilibrium in the money market. Monetary transmission mechanism.
Money and its functions.. Missions of market
Money is general equivalent for value of all goods and services. (K. Marx)
Money - is whatever generally used as money.
Money - is whatever is generally accepted in exchange.
A stock of assets that can be readily used to make transactions.
Money is whatever fulfills money functions.
Functions:
Medium of exchange G-M-G.
Measure of value or unit of account or means of evaluation. Not all the money has value itself. Value of money is purchasing power of money.The amount of goods and services that can be purchased on a given ammount of money. The higher the price level, the less the power is.
Means of storing wealth. Mean of wealth accumulation & saving
Means of future payments. Or means of establishing a value of future payments. Credit purchasing. Money for borrowing, lending, ...
There are 2 historical types of money:
Commodity money. Has intrinsic value (внутреннее, например gold, silver, etc)
Fiat money. Декретные деньги. Money that has no intrinsic value. Established as money by government.
Main problems:
What should be counted as money?
Narrow definitions of money.
They are items of money that can be spent directly or that are highly liquid. liquidity - connected with financial assets.
Liquidity of financial assets - is the ease with each financial assets can be converted into cash without loss.
In other words, a given asset is liquid if it can immediately, conveniatently and cheapy be used for making payments/transactions.
Broad definitions of money:
Are items in narrow definitions+ items that can be readily converted into cash. Are called near-money.
Near-money - items that can be readily converted into cash (not easily). It influences people's saving behaviour and consumption behaviour.
Items included in broad definition of money:
M2 = M1 + non-checkable savings deposits + small time deposits.
Small time deposits are called retailed deposits - they are deposits made at published interest rates and can't be withdrawn from the bank without loss in interest.
M3 = M2 + large time deposits
Large time deposits are called sale deposits - they are large scale deposits made at negotiated interest rates.
Government securities are counted as money in some countries.
Types of gov-t securities:
Government bond - облигации - is a government security paying a fixed sum of money each year and is redeemed on its maturity date at its face value. Government securities - are long term issued securities.
Factors diminishing the multiple deposit expansion:
1)currency outflow(currency circulation outside the bank’s sector):the bigger outflow/ the smaller the amount of money in the bank→the smaller the lending ability→the less is the circulation of money.
2)↑required reserves ratio →the smaller k(l)→↓in money circulation (cannot be used)
3)unwillingness of people to deposit or borrow in bank↓→less money bank has for operations→decr the lending ability of bank’s system.
General money supply model.
∆Ms=∆MB(additional MB)*k(m),where MB-monetary base-is the total number of currency held by public as currency and by banks as reserves. MB=C(currency circulation)+R.
k(m)-money multiplier-the number of times by which the incr in Ms exceeds incr in MB;
k(m)=(cr+1)/(cr+rr);
cr=currency-deposit ratio;the ratio of money held in currency to money held in deposits=C/D.
rr=reserve-deposit ratio;fraction of deposits kept in reserves by banks rr=R/D
k(m) will be greater if both cr and rr are greater.
k(m)↓→less lending ability
Equilibrium in the money market.
This equilibrium is achieved through changes in r.
1
)If
r were above r(e)→money balances surplus will occur→purchase of
securities and other assets→p of securities rises, r goes
down→contraction of Ms(movement adown along Ms) and incr in the
demand for money balances(esp speculative)-move down along L→r
will keep falling until it reaches r(e).2)If r were below r(e),people would have insufficient money balances.They would sell securities→lower secure prices and raise r until it reached r(e).
NB: here r actually means average r.
Influence of money market on real economy: the more money supply, the higher price level.
Influence of changes in Ms on Y and AD is called monetary transmission mechanism.
1)Direct monetary transmission mechanism (monetarists)
Assume: Ms↑→Ms>L(surplus,disbalance)→people begin to spend it to buy additional goods and services→AD↑ but Y doesn’t change(because AS is vertical)→p incr→demand-pull inflation.
2)Indirect monet transmission mechanism (Keynesians)
↑Ms→↑AD but →↑Y