Presentation on theme: "MONEY. MONETARY AGGREGATES M0 – base money (cash + deposits of the banks with the central bank) M1 – money, narrow money (cash + demand deposits) M2 –"— Presentation transcript:
MONETARY AGGREGATES M0 – base money (cash + deposits of the banks with the central bank) M1 – money, narrow money (cash + demand deposits) M2 – broad money (M1 + other deposits in domestic currency) M3 – liabilities of the banks (M2 + deposits in foreign exchange) M0 = G(cash) + RR(required reserves) + ER (nonrequired reserves) M1 = G(cash) + DD (demand deposits)
Flows of incomes and flows of expenditures M = P * Y / v m = Y / v = k * Y 1000 1000 1000 500 250 1 2 3 A B C TRANSACTION DEMAND
CENTRAL BANK CENTRAL BANK THE FUNCTIONS OF THE CENTRAL BANK (1) Adjusting supply to demand - the amount of money in circulation: Open market operations (sales and purchases of foreign exchange, government bonds, issuing own bonds) Credits to banks Reserve requirements Interest rate determination (2) Care for the liquidity of the banking system: Determination of reserve requirements rate Determination of the ratios between assets and liabilities (3) Care for general liquidity of the country: Foreign exchange reserves (4) Other functions: control of the banking system, data collection, issuing notes, etc.
M1/M0=(G+DD)/(G+RR+ER) If we define g=G/DD, r=RR/DD and e=ER/DD and divide by DD we get M1/M0 = (1+g)/(g+r+e) money multiplier g –ratio between cash and demand deposits r – required reserves ratio e – voluntary reserves ratio M1 = (1+g)/(g+r+e)*M0 MONETARY POLICY
MONETARY EQUILIBRIUM ii i Quantity of money in circulation Expansive policy Increase of demand Decrease of demand D SS D D S MONEY AND INTEREST RATE