Macroeconomics_1

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Macroeconomics The Teacher: Ivan Vadimovich Rozmainsky

[email protected]
[email protected]
https://vk.com/ivan_roz
https://www.hse.ru/org/persons/915797
Telegram +79811481639

Macroeconomics The Teacher: Ivan Vadimovich Rozmainsky irozmain@yandex.ru irozmainskij@hse.ru https://vk.com/ivan_roz https://www.hse.ru/org/persons/915797 Telegram +79811481639

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Macroeconomics Themes of Lectures

Capitalism, money, banking and monetary policy (Lecture #1)
Determination of

Macroeconomics Themes of Lectures Capitalism, money, banking and monetary policy (Lecture #1)
GDP under the fixed price level (by the Keynesian Cross model and by the IS-LM model) (Lecture #2)
Determination of GDP under the flexible price level (by the AD-AS model) (Lectures ##3-4)
Business Cycles (Financial Instability Hypothesis etc.) (Lecture #5)
Unemployment (Shapiro – Stiglitz model) (Lecture #6)
Growth (Solow model and Post-Solow models) (Lectures ##7-8)

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Macroeconomics Themes of Classes

Calculation of GDP by 3 Methods (Class #1)
Keynesian Cross

Macroeconomics Themes of Classes Calculation of GDP by 3 Methods (Class #1)
model (Class #2)
Deposit/Money Multiplier (Class #3)
The IS-LM model (Class #5)
Solow Model (Class #8)

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Macroeconomics

Lecture 1.
Capitalism, money, banking and monetary policy

Macroeconomics Lecture 1. Capitalism, money, banking and monetary policy

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What is Capitalism?

This is the special economic system analyzed by Macroeconomics!
Features of

What is Capitalism? This is the special economic system analyzed by Macroeconomics!
Capitalism include:
Private property
Market exchange
Capitalist firm as the main productive unit
Competition
Fixed capital and advanced technologies
- The special role of Money!

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What is Money?

Money is what money does!
That is: any asset performing all

What is Money? Money is what money does! That is: any asset
functions of money is money
Money has three functions in the economy:
Medium of exchange
Unit of account
Store of value

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In other words: Money is…

Money is the set of assets in the

In other words: Money is… Money is the set of assets in
economy that people regularly use to buy goods and services from other people.
The market capitalist economy is monetary economy! Almost all transactions and almost all business are based on use of money!

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The brief history of money

First, there was barter
Then, there was commodity money

The brief history of money First, there was barter Then, there was

This money takes the form of a commodity with intrinsic value.
Examples: Gold, silver, cigarettes.
Finally there was fiat money is used as money because of government decree.
It does not have intrinsic value, it has value because of decree.
Examples: Coins, paper money, check deposits.

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The types of contemporary money

Currency is the paper bills and coins in

The types of contemporary money Currency is the paper bills and coins
the hands of the public.
Demand deposits are balances in bank accounts that depositors can access on demand by writing a check.
Time deposits are balances in bank accounts that depositors can access only after a certain period. In other words, a time deposit is an interest-bearing bank account that has a pre-set date of maturity

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The story about monetary aggregates

Monetary Aggregates are broad categories that measure the

The story about monetary aggregates Monetary Aggregates are broad categories that measure
money supply in an economy.
M0: Currency.
M1: All of M0, plus demand deposits.
M2: All of M1, plus small time deposits.
M3: All of M2, plus large time deposits.
Statisticians usually take into account M2, economists in their macroeconomic models usually assume that money is M1.

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The simplest structure of contemporary money supply

The money supply equals currency plus

The simplest structure of contemporary money supply The money supply equals currency
demand (checking account) deposits:
M = C + D
Since the money supply includes deposits, the banking system plays an important role.

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Some basic concepts of Banking

Reserves (R ): the portion of deposits that

Some basic concepts of Banking Reserves (R ): the portion of deposits
banks have not lent.
To a bank, liabilities include deposits, assets include reserves and outstanding loans
100 percent reserve banking: a system in which banks hold all deposits as reserves.
Fractional reserve banking: a system in which banks hold a fraction of their deposits as reserves.
The contemporary capitalist economy is based on fractional reserve banking!

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How the commercial banks can create money

Suppose that total deposits of “Firstbank”

How the commercial banks can create money Suppose that total deposits of
are $1000, and this bank holds 20% of deposits in reserve, making loans with the rest.
It means that Firstbank can make $800 in loans.
The money supply now equals $1800: the depositor still has $1000 in demand deposits, but now the borrower holds $800 in currency.
Thus, in a fractional reserve banking system, banks create money via lending!

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The balance sheet of Firstbank

The balance sheet of Firstbank

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The story continues…

Suppose the borrower deposits the $800 in Secondbank.
But then Secondbank

The story continues… Suppose the borrower deposits the $800 in Secondbank. But
will loan 80% of this deposit

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The balance sheet of Secondbank

The balance sheet of Secondbank

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The next stage of this story…

If this $640 is eventually deposited in

The next stage of this story… If this $640 is eventually deposited
Thirdbank
then Thirdbank will keep 20% of it in reserve, and loan the rest out.

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The balance sheet of Thirdbank

The balance sheet of Thirdbank

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Finding the total money supply

Original deposit = $1000
+ Firstbank lending = $ 800
+

Finding the total money supply Original deposit = $1000 + Firstbank lending
Secondbank lending = $ 640
+ Thirdbank lending = $ 512
+ other lending
Total money supply = (1/rr ) × $1000 where rr = ratio of reserves to deposits
In our example, rr = 0.2, so M = $5000 ; Deposit (or Money) Multiplier = 1/rr ; it shows how total money supply will be changed if some deposits would be put in the banking system.

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Some important conclusions about the role of banks in the money-creating process

-

Some important conclusions about the role of banks in the money-creating process
A fractional reserve banking system allows to create money.
- Bank loans give borrowers some new money
and an equal amount of new debt.
- When banks give loans they create money; when the loans are repaid, money is destroyed
- The central bank fixes ratio of reserves to deposits in order to affect the trade-off between profitability and solvency. It is the important part of monetary policy.

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What is monetary policy?

Monetary policy is policy adopted by the monetary authority of

What is monetary policy? Monetary policy is policy adopted by the monetary
a nation to control either the interest rate or the money supply in order to affect – via aggregate demand – the important macroeconomic variables like real GDP, inflation rate etc.
Monetary policy should be distinguished from fiscal policy that tries to affect real GDP via taxation, government spending and government borrowing.

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Monetary policy can be expansionary or restrictive

Monetary policy is expansionary if the

Monetary policy can be expansionary or restrictive Monetary policy is expansionary if
central bank tries – via instruments of monetary policy – increase aggregate demand and real GDP.
Monetary policy is restrictive if the central bank tries – via instruments of monetary policy – decrease aggregate demand and the price level/the inflation rate.

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The main instruments of monetary policy

Reserve requirements.
Discount rate/base rate
Open market operations

The main instruments of monetary policy Reserve requirements. Discount rate/base rate Open market operations

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Reserve requirements

The reserve requirement is regulation that sets the minimum amount of reserves that

Reserve requirements The reserve requirement is regulation that sets the minimum amount
must be held by a commercial bank.
The minimum reserve is generally determined by the central bank to be no less than a specified percentage of the amount of deposit liabilities the commercial bank owes to its customers.
The commercial bank's reserves normally consist of cash owned by the bank and stored physically in the bank vault (vault cash), plus the amount of the commercial bank's balance in that bank's account with the central bank.

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The discount rate/base rate

The discount rate/base rate is price of borrowing money

The discount rate/base rate The discount rate/base rate is price of borrowing
from the central bank by commercial banks, usually on a short-term basis.
Usually the discount rate sets the “floor” for market short-term interest rate set by the commercial banks for their borrowers.

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Open market operations

Open market operations are an activity by a central bank to give (or

Open market operations Open market operations are an activity by a central
take) liquidity in its currency to (or from) a bank or a group of banks.
The central bank can either buy or sell government bonds in the open market (this is where the name was historically derived from) or, in what is now mostly the preferred solution, enter into secured lending transaction with a commercial bank.
In other words, the central bank gives the money as a deposit for a defined period and synchronously takes an eligible asset as collateral. 

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If the central bank wants to make expansionary policy that it will

Soften

If the central bank wants to make expansionary policy that it will
reserve requirements.
Reduce the discount rate/base rate
Buy government bonds by giving money to the commercial banks.

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If the central bank wants to make restrictive policy that it will

Tighten

If the central bank wants to make restrictive policy that it will
reserve requirements.
Increase the discount rate/base rate
Sell government bonds by taking money from the commercial banks.

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Something about the demand for money

The effectiveness of monetary policy depends on

Something about the demand for money The effectiveness of monetary policy depends
– other things being equal – changes in demand for money.
The demand for money is not quantity of money that is necessary for providing absolute happiness…
The demand for money is the quantity of money that people plan to hold. This quantity depends mainly on:
The price level
The interest rate
Real GDP
Financial innovations

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The price level as a factor of the demand for money

A rise

The price level as a factor of the demand for money A
in the price level increases the nominal quantity of money demanded but doesn’t change the real quantity of money that people plan to hold.
Nominal money is the amount of money measured in rubles/dollars/euros.
The quantity of nominal money demanded is proportional to the price level — a 10 percent rise in the price level increases the quantity of nominal money demanded by 10 percent.

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The interest rate as a factor of the demand for money

The interest

The interest rate as a factor of the demand for money The
rate is the opportunity cost of holding wealth in the form of money rather than an interest-bearing asset.
In other words, when people hold money, they lose interest income.
A rise in the interest rate decreases the quantity of money that people plan to hold.

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The real GDP as a factor of the demand for money

The idea

The real GDP as a factor of the demand for money The
is that people receive wages and salaries 1-2 times per month, but make expenditure almost every day.
Money holding allows to fill the “gap” in time between incomes and expenditures.
An increase in real GDP increases the volume of expenditure, which increases the quantity of real money that people plan to hold.

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Financial innovations as a factor of the demand for money

Financial innovation that

Financial innovations as a factor of the demand for money Financial innovation
lowers the cost of switching between money and interest-bearing assets decreases the quantity of money that people plan to hold.
For example, an expansion of financial markets or an emergence of new types of debit/credit cards will decrease the demand for money.

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The money supply and the demand for money together

Economists usually prefer to

The money supply and the demand for money together Economists usually prefer
construct macroeconomic models in which:
The money supply does not depend on the interest rate – because the central bank is able to control the quantity of money in the economy – or the money supply positively depends on the interest rate because the commercial banks will increase loans (and create money) as the interest rates rises.
The demand for money negatively depends on the interest rate – because the interest rate is the opportunity cost of money holding.

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The money market equilibrium

The money market equilibrium

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The consequences of an increase in the nominal money supply

The consequences of an increase in the nominal money supply

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The consequences of an increase in the price level

The consequences of an increase in the price level
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