Professional Documents
Culture Documents
Topic 7:
macroeconomics
fifth edition
N. Gregory Mankiw
PowerPoint Slides
by Ron Cronovich
2002 Worth Publishers, all rights reserved
CHAPTER 4
slide 2
% per year
10
8
6
4
2
0
1960
1965
1970
1975
1980
inflation rate
CHAPTER 4
1985
1990
1995
2000
slide 3
CHAPTER 4
slide 4
Money: definition
Money is _____
_______________
_______________.
CHAPTER 4
slide 5
Money: functions
1. _________________
slide 6
Money: types
1. ____________
has no intrinsic value
example: the paper currency we
use
2. ____________
has intrinsic value
examples: gold coins,
CHAPTER 4
slide 7
Discussion Question
Which of these are money?
a. Currency
b. Checks
c. Deposits in checking accounts
(called demand deposits)
d. Credit cards
e. Certificates of deposit
(called time deposits)
CHAPTER 4
slide 8
CHAPTER 4
slide 9
In the U.S.,
the central
bank is
called the
Federal
Reserve
(the
Fed).
CHAPTER 4
slide 10
Currency
M1
C + ___________,
travelers checks,
other checkable deposits
Amount
$598.7
1174.0
M2
M1 + _____________,
5480.1
savings deposits,
money market mutual funds,
money market deposit accounts
M3
M2 + ____________,
8054.4
repurchase agreements,
institutional money market
mutual
balances
CHAPTER 4fund
Money
and Inflation
slide 11
CHAPTER 4
slide 12
Velocity
basic concept: the rate at which money
circulates
definition: ___________________
____________________________
example: In 2001,
$500 billion in transactions
money supply = $100 billion
The average dollar is used in five
transactions in 2001
So, velocity = ___
CHAPTER 4
slide 13
Velocity, cont.
This suggests the following definition:
where
V = velocity
T = value of all transactions
M = money supply
CHAPTER 4
slide 14
Velocity, cont.
Use nominal GDP as a proxy for total
transactions.
P Y
V
M
Then,
where
P
deflator)
Y
CHAPTER 4
slide 15
It is an identity:
it holds by definition of the variables.
CHAPTER 4
slide 16
CHAPTER 4
slide 17
(M/P )d = k Y
quantity equation: M V = P Y
The connection between them:
________
slide 18
V V
With this assumption, the quantity
equation can be written as
M V P Y
CHAPTER 4
slide 19
slide 20
M
V
P
Y
The quantity theory of money assumes
V
V is constant, so
= 0.
V
CHAPTER 4
slide 21
P
P
M
P Y
M
P
Y
preceding slide
was:
Solve this
result
for to get
CHAPTER 4
slide 22
________________________________________
___________.
CHAPTER 4
slide 23
International data on
inflation and money growth
Inflation rate
10,000
(perc ent,
logarithmic
sc ale)
1,000
Democratic Repub
Nicaragua of Congo
Angola
Brazil
Georgia
100
Bulgaria
10
Germany
Kuwait
1
USA
Oman
0.1
0.1
CHAPTER 4
Japan
10
Canada
100
1,000
10,000
Money supply growth (perc ent, logarithmic
slide 25
U.S. data on
inflation and money growth
Inflation 8
rate
(perc ent)
6
1910s
1970s
1940s
1980s
4
1950s
1990s
2
0
1890s
1880s
1930s
1870s
1920s
-2
-4
1960s
1900s
CHAPTER 4
8
10
12
Growth in money supply (perc en
slide 26
Seigniorage
To spend more without raising taxes or
selling bonds, the govt can print money.
The __________:
Printing money to raise revenue causes
inflation. Inflation is like a tax on
people who hold money.
CHAPTER 4
slide 27
CHAPTER 4
slide 28
__________
Chap 3: S = I determines r .
Hence, an increase in
causes an equal increase in i.
CHAPTER 4
slide 29
Nominal
interest rate
Inflation
rate
2
0
-2
1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000
Year
CHAPTER 4
slide 30
100
Nominal
interest rate
(perc ent,
logarithmic
sc ale)
Kazakhstan
Kenya
Uruguay
Armenia
Italy
France
10
Nigeria
United Kingdom
United States
Japan
Germany
Singapore
CHAPTER 4
10
100
1000
Inflation rate (perc ent, logarithmic s
slide 31
Exercise:
Suppose V is constant, M is growing 5% per
year, Y is growing 2% per year, and r = 4.
a. Solve for i (the nominal interest rate).
b. If the Fed increases the money growth rate
by
2 percentage points per year, find i .
c. Suppose the growth rate of Y falls to 1% per
year.
What will happen to ?
What must the Fed do if it wishes to
keep constant?
CHAPTER 4
slide 32
Answers:
Suppose V is constant, M is growing 5% per
year, Y is growing 2% per year, and r = 4.
a.
b.
c. .
CHAPTER 4
slide 33
__________________________________________
_________________
__________________________________________
___________________
CHAPTER 4
slide 34
Hence, ______________________.
CHAPTER 4
slide 35
____________
higher Y more spending
so, need more money
slide 36
CHAPTER 4
slide 37
Equilibrium
M
e
L(r , Y )
P
The supply of
real money
balances
CHAPTER 4
Real money
demand
slide 38
M
r
Y
CHAPTER 4
slide 39
How P responds to M
M
e
L(r , Y )
P
For given values of r, Y, and e,
a change in M causes P to ______
_________________________ --- just like
in the Quantity Theory of Money.
CHAPTER 4
slide 40
slide 41
How P responds to e
M
e
L(r , Y )
P
For given values of r, Y, and M ,
CHAPTER 4
slide 42
Discussion Question
CHAPTER 4
slide 43
A common misperception
Common misperception:
inflation reduces real wages
CHAPTER 4
slide 44
So why, then, is
inflation a social
problem?
CHAPTER 4
slide 45
CHAPTER 4
slide 46
i
real money balances
slide 47
CHAPTER 4
slide 48
Example:
Suppose a firm issues new catalog each
January. As the general price level rises
throughout the year, the firms relative price
will fall.
slide 49
slide 50
CHAPTER 4
slide 51
slide 52
slide 53
Inflation
Inflationallows
allowsthe
thereal
realwages
wagesto
toreach
reach
equilibrium
equilibriumlevels
levelswithout
withoutnominal
nominalwage
wage
cuts.
cuts.
Therefore,
Therefore,moderate
moderateinflation
inflationimproves
improves
the
thefunctioning
functioningof
oflabor
labormarkets.
markets.
CHAPTER 4
slide 54
Hyperinflation
def: 50% per month
All the costs of moderate inflation described
above become
HUGE
under hyperinflation.
CHAPTER 4
slide 55
CHAPTER 4
slide 56
slide 57
slide 58
Chap 3,
nominal ones in Chap 4.
Classical Dichotomy : the theoretical
separation of real and nominal variables
in the classical model, which implies
__________________________________________
_____________________________.
_________________ : Changes in the money
supply do not affect real variables.
In the real world, money is approximately
neutral in the long run.
CHAPTER 4
slide 60
Chapter summary
1. Quantity theory of money
2. Money demand
depends on income in the
Quantity Theory
more generally, it also depends
on the nominal interest rate;
CHAPTER 4
slide 61
Chapter summary
3. Nominal interest rate
4. Hyperinflation
CHAPTER 4
slide 62
Chapter summary
5. Classical dichotomy
In classical theory, money is neutral--
CHAPTER 4
slide 63