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Lecture 8, week 8
Topic 5
Monetary System and Monetary Policy
Chapters 11 and 12
Copyright 2015 Pearson Australia (a division of Pearson Australia Group Pty Ltd) 9781486010233/Hubbard/Macroeconomics 3/e
Chapter 11
Monetary System
Money, Banks and
the Reserve Bank of
Australia
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Learning objectives
1. Define money and discuss its functions.
2. Discuss the definitions of the money supply used in
Australia today.
3. Explain how financial institutions create money.
4. Discuss the role of the Reserve Bank of Australia.
5. Overview the quantity theory of money and use it to
explain how high rates of inflation can occur.
Copyright 2015 Pearson Australia (a division of Pearson Australia Group Pty Ltd) 9781486010233/Hubbard/Macroeconomics 3/e
LEARNING OBJECTIVE 1
Copyright 2015 Pearson Australia (a division of Pearson Australia Group Pty Ltd) 9781486010233/Hubbard/Macroeconomics 3/e
LEARNING OBJECTIVE 1
Copyright 2015 Pearson Australia (a division of Pearson Australia Group Pty Ltd) 9781486010233/Hubbard/Macroeconomics 3/e
Making
the
Connection 11.1
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LEARNING OBJECTIVE 1
1.
Medium of exchange.
2.
Unit of account.
3.
Store of value.
4.
Copyright 2015 Pearson Australia (a division of Pearson Australia Group Pty Ltd) 9781486010233/Hubbard/Macroeconomics 3/e
LEARNING OBJECTIVE 1
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LEARNING OBJECTIVE 1
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LEARNING OBJECTIVE 2
11
Copyright 2015 Pearson Australia (a division of Pearson Australia Group Pty Ltd) 9781486010233/Hubbard/Macroeconomics 3/e
LEARNING OBJECTIVE 2
12
Copyright 2015 Pearson Australia (a division of Pearson Australia Group Pty Ltd) 9781486010233/Hubbard/Macroeconomics 3/e
LEARNING OBJECTIVE 2
13
Copyright 2015 Pearson Australia (a division of Pearson Australia Group Pty Ltd) 9781486010233/Hubbard/Macroeconomics 3/e
LEARNING OBJECTIVE 2
14
Copyright 2015 Pearson Australia (a division of Pearson Australia Group Pty Ltd) 9781486010233/Hubbard/Macroeconomics 3/e
Source: Created from Reserve Bank of Australia (2014), Monetary Aggregates, Table D03 at <www.rba.gov.au>, viewed 16 May 2014.
15
Copyright 2015 Pearson Australia (a division of Pearson Australia Group Pty Ltd) 9781486010233/Hubbard/Macroeconomics 3/e
LEARNING OBJECTIVE 2
16
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LEARNING OBJECTIVE 2
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LEARNING OBJECTIVE 3
Copyright 2015 Pearson Australia (a division of Pearson Australia Group Pty Ltd) 9781486010233/Hubbard/Macroeconomics 3/e
Assets ($ millions)
Reserves
50 000
Loans
Other assets
110 000
Total assets
510 000
19
Deposits
Other liabilities
000
Total liabilities
Shareholders equity
Total liabilities and
shareholders equity
Copyright 2015 Pearson Australia (a division of Pearson Australia Group Pty Ltd) 9781486010233/Hubbard/Macroeconomics 3/e
300 000
60 000
50 000
40
450 000
60 000
510 000
LEARNING OBJECTIVE 3
20
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LEARNING OBJECTIVE 3
21
Copyright 2015 Pearson Australia (a division of Pearson Australia Group Pty Ltd) 9781486010233/Hubbard/Macroeconomics 3/e
LEARNING OBJECTIVE 3
22
Copyright 2015 Pearson Australia (a division of Pearson Australia Group Pty Ltd) 9781486010233/Hubbard/Macroeconomics 3/e
LEARNING OBJECTIVE 3
23
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LEARNING OBJECTIVE 3
24
Copyright 2015 Pearson Australia (a division of Pearson Australia Group Pty Ltd) 9781486010233/Hubbard/Macroeconomics 3/e
25
Bank
Save-IT
$1000
Thrifty
Third Bank
Fourth Bank
Total change in
demand account
deposits
$10 000
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LEARNING OBJECTIVE 3
1
Simple deposit multiplier
RR
26
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LEARNING OBJECTIVE 3
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LEARNING OBJECTIVE 4
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LEARNING OBJECTIVE 4
29
Copyright 2015 Pearson Australia (a division of Pearson Australia Group Pty Ltd) 9781486010233/Hubbard/Macroeconomics 3/e
LEARNING OBJECTIVE 4
30
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LEARNING OBJECTIVE 4
31
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LEARNING OBJECTIVE 4
32
Copyright 2015 Pearson Australia (a division of Pearson Australia Group Pty Ltd) 9781486010233/Hubbard/Macroeconomics 3/e
LEARNING OBJECTIVE 5
M xV P xY
M = money supply; V = velocity of money
P = price level; Y = real GDP
33
Copyright 2015 Pearson Australia (a division of Pearson Australia Group Pty Ltd) 9781486010233/Hubbard/Macroeconomics 3/e
LEARNING OBJECTIVE 5
P xY
V
M
34
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LEARNING OBJECTIVE 5
35
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LEARNING OBJECTIVE 5
36
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LEARNING OBJECTIVE 5
37
Copyright 2015 Pearson Australia (a division of Pearson Australia Group Pty Ltd) 9781486010233/Hubbard/Macroeconomics 3/e
Making
the
Connection 11.3
38
Copyright 2015 Pearson Australia (a division of Pearson Australia Group Pty Ltd) 9781486010233/Hubbard/Macroeconomics 3/e
Making
the
Connection 11.2
Copyright 2015 Pearson Australia (a division of Pearson Australia Group Pty Ltd) 9781486010233/Hubbard/Macroeconomics 3/e
An inside look
An Australasian currency?
There could be
considerable advantages
to having a single
currency common to
Australia and New
Zealandbut opponents
point to the lack of the
ability to control domestic
monetary policy and
therefore interest rates
and inflation.
40
Copyright 2015 Pearson Australia (a division of Pearson Australia Group Pty Ltd) 9781486010233/Hubbard/Macroeconomics 3/e
Chapter 12
Monetary Policy
PowerPoint to accompany:
somchaij/Shutterstock
Learning objectives
1. Define monetary policy and describe the main goals of
monetary policy in Australia.
2. Describe how the Reserve Bank of Australia affects
interest rates.
3. Use the dynamic aggregate demand and aggregate
supply model to show the effects of monetary policy on
real GDP and the price level.
4. Discuss the Reserve Bank of Australias use of monetary
policy to target inflation.
5. Assess the arguments for and against the independence
of the Reserve Bank of Australia.
42
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LEARNING OBJECTIVE 1
44
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LEARNING OBJECTIVE 1
Copyright 2015 Pearson Australia (a division of Pearson Australia Group Pty Ltd) 9781486010233/Hubbard/Macroeconomics 3/e
46
Source: Reserve Bank of Australia (2014), Measures of consumer price inflation, Table G01, at <www.rba.gov.au>, viewed 18 May 2014.
Copyright 2015 Pearson Australia (a division of Pearson Australia Group Pty Ltd) 9781486010233/Hubbard/Macroeconomics 3/e
LEARNING OBJECTIVE 2
Copyright 2015 Pearson Australia (a division of Pearson Australia Group Pty Ltd) 9781486010233/Hubbard/Macroeconomics 3/e
2. causes an
increase in the
quantity of money
demanded.
7%
6%
Money demand, MD
0
48
$250
300
Quantity of money, M
(billions of dollars)
Copyright 2015 Pearson Australia (a division of Pearson Australia Group Pty Ltd) 9781486010233/Hubbard/Macroeconomics 3/e
Copyright 2015 Pearson Australia (a division of Pearson Australia Group Pty Ltd) 9781486010233/Hubbard/Macroeconomics 3/e
LEARNING OBJECTIVE 2
49
Copyright 2015 Pearson Australia (a division of Pearson Australia Group Pty Ltd) 9781486010233/Hubbard/Macroeconomics 3/e
An increase in real
GDP or an
increase in the
price level will shift
money demand to
the right.
A decrease in
real GDP or
a decrease in
the price
level will shift
money
demand to
the left.
MD2
MD3
0
50
MD1
Quantity of money, M
(billions of dollars)
Copyright 2015 Pearson Australia (a division of Pearson Australia Group Pty Ltd) 9781486010233/Hubbard/Macroeconomics 3/e
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LEARNING OBJECTIVE 2
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52
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LEARNING OBJECTIVE 2
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LEARNING OBJECTIVE 2
Copyright 2015 Pearson Australia (a division of Pearson Australia Group Pty Ltd) 9781486010233/Hubbard/Macroeconomics 3/e
55
Source: Reserve Bank of Australia (2014), About Monetary Policy, Graph 2 at <www.rba.gov. au>, viewed 24 January 2014. Reserve Bank of Australia,
20012010. All rights reserved.
Copyright
2015 Pearson
PearsonAustralia
Australia(a(adivision
divisionofofPearson
Pearson
Australia
Group
Ltd)
9781486010233/Hubbard/Macroeconomics
Copyright 2015
Australia
Group
PtyPty
Ltd)
9781486010233/Hubbard/Macroeconomics
3/e 3/e
LEARNING OBJECTIVE 2
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LEARNING OBJECTIVE 2
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LEARNING OBJECTIVE 2
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LEARNING OBJECTIVE 2
59
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Money
supply, MS
7%
MD
0
60
$900
Quantity of money
(billions of dollars)
Copyright 2015 Pearson Australia (a division of Pearson Australia Group Pty Ltd) 9781486010233/Hubbard/Macroeconomics 3/e
Copyright 2015 Pearson Australia (a division of Pearson Australia Group Pty Ltd) 9781486010233/Hubbard/Macroeconomics 3/e
LEARNING OBJECTIVE 2
Copyright 2015 Pearson Australia (a division of Pearson Australia Group Pty Ltd) 9781486010233/Hubbard/Macroeconomics 3/e
Money
supply, MS1
MS2
7%
1. When the
RBA increases
the money
supply from MS1
to MS2
6%
2. the
equilibrium
interest
rate falls.
MD
0
62
$900
950
Quantity of money
(billions of dollars)
Copyright 2015 Pearson Australia (a division of Pearson Australia Group Pty Ltd) 9781486010233/Hubbard/Macroeconomics 3/e
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LEARNING OBJECTIVE 2
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LEARNING OBJECTIVE 3
64
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LEARNING OBJECTIVE 3
Copyright 2015 Pearson Australia (a division of Pearson Australia Group Pty Ltd) 9781486010233/Hubbard/Macroeconomics 3/e
LEARNING OBJECTIVE 3
Copyright 2015 Pearson Australia (a division of Pearson Australia Group Pty Ltd) 9781486010233/Hubbard/Macroeconomics 3/e
LEARNING OBJECTIVE 3
67
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LEARNING OBJECTIVE 3
68
Copyright 2015 Pearson Australia (a division of Pearson Australia Group Pty Ltd) 9781486010233/Hubbard/Macroeconomics 3/e
LRAS1
LRAS2
SRAS1
SRAS2
103
102
100
B
AD2(with policy)
AD2(without
policy)
AD1
0
69
$1000
1075 1100
Copyright 2015 Pearson Australia (a division of Pearson Australia Group Pty Ltd) 9781486010233/Hubbard/Macroeconomics 3/e
Making
the
Connection 12.1
70
Source: Created from Federal Reserve (2014), Selected interest rates, Table H.15, Federal Reserve Statistical Release, at <www.federalreserve.gov>, viewed 23 January 2014.
Copyright 2015 Pearson Australia (a division of Pearson Australia Group Pty Ltd) 9781486010233/Hubbard/Macroeconomics 3/e
LEARNING OBJECTIVE 3
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LEARNING OBJECTIVE 3
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LEARNING OBJECTIVE 3
73
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LEARNING OBJECTIVE 3
74
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100
LRAS1
LRAS2
SRAS1
SRAS2
B
A
AD2(without policy
AD2(with policy)
0
75
AD1
930
1000 1030
Copyright 2015 Pearson Australia (a division of Pearson Australia Group Pty Ltd) 9781486010233/Hubbard/Macroeconomics 3/e
LEARNING OBJECTIVE 3
Copyright 2015 Pearson Australia (a division of Pearson Australia Group Pty Ltd) 9781486010233/Hubbard/Macroeconomics 3/e
LEARNING OBJECTIVE 3
Copyright 2015 Pearson Australia (a division of Pearson Australia Group Pty Ltd) 9781486010233/Hubbard/Macroeconomics 3/e
LEARNING OBJECTIVE 3
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Making
the
Connection 12.2
79
Copyright 2015 Pearson Australia (a division of Pearson Australia Group Pty Ltd) 9781486010233/Hubbard/Macroeconomics 3/e
Other
interest
rates fall
Investment,
consumption
and net
exports
increase
The AD
curve shifts
to the right
by more
than it
otherwise
would have
Other
interest
rates rise
Investment,
consumption
and net
exports
decrease
The AD
curve shifts
to the right
by less
than it
otherwise
would have
Copyright 2015 Pearson Australia (a division of Pearson Australia Group Pty Ltd) 9781486010233/Hubbard/Macroeconomics 3/e
Real GDP
and the
price level
rise by
more than
they would
have
without
policy
Real GDP
and the
price level
rise by less
than they
would have
without
policy
LEARNING OBJECTIVE 4
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LEARNING OBJECTIVE 4
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Making
the
Connection 12.3
83
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LEARNING OBJECTIVE 5
84
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LEARNING OBJECTIVE 5
85
Copyright 2015 Pearson Australia (a division of Pearson Australia Group Pty Ltd) 9781486010233/Hubbard/Macroeconomics 3/e
An inside look
The Bank of England holds record low rates
86