MONEY AND PRICE Money market

Money - History division of labor  barter „double coincidence of wants“ „universal equivalent“ = commodity money paper money time of golden standard

The classical quantity theory of money M*V = P*Q MONETARY AGREGATES: M1 = TRANSACTIONS MONEY M2= BROAD MONEY M3 L = „liquid assets“ D = credit

MONEY FUNCTIONS medium of exchange unit of account store of value

Demand for Money The transaction demand The asset demand COST OF HOLDING MONEY – the interest loss because money is not invested in alternative assets Motives for holding money Transaction Precautionary Speculative

Factors affecting MD change in real output (GDP), change in price level,.. Other changes in economic conditions (transaction cost of converting near money into money, change in bond prices..)

fig 2.2 MD1MD1 Interest rate i OQ0Q0 Q1Q1 M An increase in demand for money MD0MD0

Money market Money supply – little sensitive or completely insensitive to interest rate Determined by the central bank

PRICE 1) Price as a result of what has to be expend on production of goods 2) Price as a reflection of utility rate of production

1. Assuming: average price level in economy is 1,5, real GDP 240 mld. EUR, money supply 60 mld. EUR. What’s the velocity of money like? 2. Assuming, the V is constant. What will happen in economy described in task nr.1 if the money supply increases by 20 mld. EUR? 3. Calculate the velocity of money, if the monetary base consists of paper currency 110,2 mld., demand deposits 321 mld., time deposits 504,8 mld and the value of final production is 1205,5 mld.