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Economics for Leaders

Economics for Leaders. Lesson 9: Money & Inflation. ICBIF!. You all are doing GREAT!. Hang in there!. What is Money?. Money is ANYTHING that is generally accepted in payment for goods and services. woodpecker skulls, whale’s teeth stones, shells, beads, feathers

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Economics for Leaders

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  1. Economics for Leaders

    Lesson 9: Money & Inflation
  2. ICBIF! You all are doing GREAT! Hang in there!
  3. What is Money? Money is ANYTHING that is generally accepted in payment for goods and services. woodpecker skulls, whale’s teeth stones, shells, beads, feathers tobacco, fur, corn, barley, liquor gold, silver, bronze, copper magic beans, golden eggs paper, coins
  4. Voluntary Transactions Increase Well-being Money… is a unit of account ($1, $2, $3…) is a store of value (I can use it later) is a common language The value of money comes from what we can get with it.
  5. I can’t believe he ripped up $5
  6. Voluntary Transactions Increase Well-being Money… is a medium of exchange is widely accepted for purchases is a common language The value of money comes from what we can get with it.
  7. Voluntary Transactions Increase Well-being Money… lowers transaction costs increases the # of transactions is a common language The value of money comes from what we can get with it.
  8. Voluntary Transactions Increase Well-being We understand what money is (agreeable). We are confident money can be subsequently exchanged for goods & services (trusted). The value of money comes from what we can get with it.
  9. Who doesn’t love MONEY?
  10. I can’t believe he ripped up $5
  11. Money Reduces Transaction Costs of Exchange No double coincidence of wants and desires Does anybody want some econ? Barter may work, but… it’s inconvenient and time consuming
  12. The Case of the PENNY MB > MC??
  13. Shredding Paper Money MB > MC??
  14. In the U.S. today, money is… currency & coin, demand deposits savings deposits time deposits M1, M2, M3 (liquidity)
  15. Why hold “CASH” money? transactions precautionary reasons store of wealth you could hold interest-earning assets instead such as certificates of deposit, stocks, bonds, real estate. holding money has an opportunity cost liquidity
  16. The Market for Money (S & D) What determines interest rates? Who are the suppliers? Anyone with excess money balances. Who are the demanders? Anyone with constrained money balances. What is the equilibrium?
  17. What determines interest rates? Rates change within markets in response to changes in supply and demand for funds. ↑ S or ↓ S ↑ D or ↓ D Relative scarcity!
  18. What determines interest rates? Rates also differ as a result of the degree of risk and the length of time of loan.
  19. The Money Supply Total available purchasing power in the economy at a point in time. M1, M2 & M3 How much money is there?
  20. How Much Money is Out There? St. Louis Federal Reserve Bank (FRED): http://research.stlouisfed.org/fred2/categories/24
  21. Why do we worry about the money supply? Experience has shown us that the money supply is the most important factor affecting general price levels. Inflation Inflation must be taken seriously because it alters incentives and people’s economic behavior, and consequently, it negatively impacts the economy as a whole.
  22. Inflation A general, sustained increase in the price level. The erosion or decline of purchasing power. Econ 101, lending, borrowing and inflation A short lesson
  23. Measuring Inflation: The CPI The Bureau of Labor Statistics Determines the items in the market basket Calculates the CPI: = CPI X 100 Price of basket in current year Price of basket in base year
  24. CPI base year = 100 Suppose CPI year 1 = 110 What does it mean? 10% increase in prices that year Average Annual Inflation Rate = % change in CPI / # years CPI year 2 = 114 (be careful)
  25. Inflation Reduces the Value of the Dollar Price Level
  26. Same Products – Higher Prices
  27. Bureau of Labor Statistics: http://www.bls.gov
  28. Bureau of Labor Statistics: http://www.bls.gov
  29. What sector has seen the largest price increases since 1990? Energy Food College Tuition Medical Care Housing
  30. Bureau of Labor Statistics: http://www.bls.gov
  31. What Causes Inflation ? All periods of significant sustained inflation have been accompanied by increases in the money supply Manage the Money Supply: The Job of the Federal Reserve System!
  32. How does the Fed manage the money supply and facilitate economic activity? Do banks have all of your money on hand? Could we all have all of our money at once? Trusted and agreedupon value.
  33. The Banking System & The Money Supply Commercial banks’ ability to make loans Fed tools for influencing banks’ willingness to make loans: reserve requirement discount rate open market operations
  34. Monetary Policy The actions undertaken by the Federal Reserve, to influence the availability and cost of money and credit to help promote national economic goals. The Federal Reserve Act of 1913 gave the Federal Reserve responsibility for setting monetary policy. Board of Governors: discount rate, reserve requirement Open Market Committee: open market operations.
  35. The Banking System & The Money Supply $100 $100 Money Supply = $100 John
  36. Money Supply = $100 + $90 + $81 = $271 $100 $100 John
  37. Lending creates additional purchasing power by increasing the money supply Money Supply = $100 + $90 + $81 = $271
  38. Open Market Operations The most important tool of the Fed in controlling the money supply. It can be, and is, used on a daily basis. Its effect is immediate. It can be used to target interest rates.
  39. Fed buys/sells government securities to alter the availability of money to the public. How does it work? Fed Sally’s Bank Sally
  40. Open Market Operations:When the Fed Sells Bonds Sally FedSellsBonds Who ends up with the money? Who ends up with the bond? What happened to the money supply? Fed
  41. Open Market Operations:When the Fed Buys Bonds Sally FedBuysBonds Who ends up with the money? Who ends up with the bond? What happened to the money supply? Fed
  42. Open Market Operations Buy bonds: Bank deposits Bank reserves The supply of money to lend Interest rates Open Market Operations allows the Fed to manage interest rates Open Market Operations Sell bonds: Bank deposits Bank reserves The supply of money to lend Interest rates
  43. A sound & well-managed money supply is one of the keys to the wealth of nations
  44. Which would you rather have? Lunch for 8 people costs 6 million Zimbabwean dollars or about $18.
  45. Hyperinflation in Zimbabwe A Zimbabwean friend who runs a business recently told me, “If you don’t get a bill collected in 48 hours, it isn’t worth collecting, because it is worthless. Whenever we get money, we must immediately spend it, just go and buy what we can. Our pension was destroyed ages ago. None of us have any savings left.” http://davidcoltart.com/archive/2008/376 “Dying Silently in Zimbabwe,” by Michael Gerson, Washington Post, Feb 20, 2008
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