1. www.gu.se Karlstad Universitet Makroekonomi VT2012 Pengar och det finansiella systemet

2. www.gu.se Finansiella marknader Aktier Obligationer Penningmarknads- instrument Aktier Obligationer Penningmarknads- instrument Långivare Hushåll Företag Riksbanken Långivare Hushåll Företag Riksbanken Kreditinstitut Försäkringsbolag Värdepappersbolag Kreditinstitut Försäkringsbolag Värdepappersbolag Låntagare Företag Hushåll Offentlig sektor Låntagare Företag Hushåll Offentlig sektor

3. www.gu.se Betydelsen av finansiella intermediärer Skapar likviditet Minimerar lånekostnader Riskspridning Fördelar lån till de mest gynnsamma investeringarna Tjänar pengar på räntenettot => skillnaden på utlånings- och inlåningsräntan.

4. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Macroeconomics: Principles, Applications, and Tools O’Sullivan, Sheffrin, Perez 6/e. 4 of 25 C H A P T E R 14 The Federal Reserve and Monetary Policy Global ekonomi, Kapitel 7, Copyright: Claes Berg & SNS Förlag 4

5. C H A P T E R 13 Money and the Banking System 5 of 28 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Macroeconomics: Principles, Applications, and Tools O’Sullivan, Sheffrin, Perez 6/e. WHAT IS MONEY? (cont’d) 13.1 Measuring Money in the U.S. Economy ● M1 The sum of currency in the hands of the public, demand deposits, other checkable deposits, and traveler’s checks.  FIGURE 13.1 Components of M1 for the United States Currency is the largest component of M1, the most basic measure of money. Demand and other checkable deposits are the next largest components.

6. C H A P T E R 13 Money and the Banking System 6 of 28 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Macroeconomics: Principles, Applications, and Tools O’Sullivan, Sheffrin, Perez 6/e. WHAT IS MONEY? (cont’d) 13.1 Measuring Money in the U.S. Economy ● M2 M1 plus other assets, including deposits in savings and loans accounts and money market mutual funds.  FIGURE 13.2 Components of M2 in the United States Savings deposits are the largest component of M2, followed by M1, small time deposits, and money market mutual funds.

7. C H A P T E R 13 Money and the Banking System 7 of 28 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Macroeconomics: Principles, Applications, and Tools O’Sullivan, Sheffrin, Perez 6/e. HOW BANKS CREATE MONEY 13.2 A Bank’s Balance Sheet: Where the Money Comes from and Where It Goes ● owners’ equity The funds provided to a bank by its owners.  FIGURE 13.3 A Balance Sheet for a Bank The figure shows a hypothetical balance sheet for a bank holding 10 percent in required reserves, $200. Banks don’t earn interest on their reserves, so they will usually want to loan out any excess of the amounts they are required to hold. This bank has loaned out all of its excess reserves, $2,000.

8. C H A P T E R 13 Money and the Banking System 8 of 28 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Macroeconomics: Principles, Applications, and Tools O’Sullivan, Sheffrin, Perez 6/e. HOW BANKS CREATE MONEY 13.2 How Banks Create Money ● reserve ratio The ratio of reserves to deposits.  FIGURE 13.4 Process of Deposit Creation: Changes in Balance Sheets The figure shows how an initial deposit of $1,000 can expand the money supply. The first three banks in the figure loaned out all their excess reserves and the borrowers deposited the full sum of their loans. In the real world, though, people hold part of their loans as cash and banks don’t necessarily loan out every last dime of their excess reserves. Consequently, a smaller amount of money will be created than what’s shown here.

9. C H A P T E R 13 Money and the Banking System 9 of 28 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Macroeconomics: Principles, Applications, and Tools O’Sullivan, Sheffrin, Perez 6/e. HOW BANKS CREATE MONEY 13.2 How the Money Multiplier Works ● money multiplier The ratio of the increase in total checking account deposits to an initial cash deposit. How the Money Multiplier Works in Reverse The money multiplier working in reverse decreases the money supply.

10. C H A P T E R 13 Money and the Banking System 10 of 28 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Macroeconomics: Principles, Applications, and Tools O’Sullivan, Sheffrin, Perez 6/e. THE GROWTH IN EXCESS RESERVES APPLYING THE CONCEPTS #2: Why have banks recently started to hold vast amounts of excess reserves? ► FIGURE 13.5 Required and total Reserves of Banks Until September of 2008, banks held few excess reserves so total reserves (in red) were very close to required reserves (in purple). In response to the financial crisis of 2008, the Fed injected large amounts of reserves into the system and began paying interest on reserves in October. As a result, excess reserves rose and total reserves now exceed required reserves A P P L I C A T I O N 2

11. C H A P T E R 13 Money and the Banking System 11 of 28 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Macroeconomics: Principles, Applications, and Tools O’Sullivan, Sheffrin, Perez 6/e. money market The market for money in which the amount supplied and the amount demanded meet to determine the nominal interest rate. transaction demand for money The demand for money based on the desire to facilitate transactions. The Demand for Money INTEREST RATES AFFECT MONEY DEMAND THE MONEY MARKET 14.1

12. C H A P T E R 13 Money and the Banking System 12 of 28 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Macroeconomics: Principles, Applications, and Tools O’Sullivan, Sheffrin, Perez 6/e.  FIGURE 14.1 Demand for Money P R I N C I P L E O F O P P O RT U N I T Y C O S T The opportunity cost of something is what you sacrifice to get it. As interest rates increase from r 0 to r 1, the quantity of money demanded falls from M 0 to M 1.

13. C H A P T E R 13 Money and the Banking System 13 of 28 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Macroeconomics: Principles, Applications, and Tools O’Sullivan, Sheffrin, Perez 6/e. The Demand for Money THE PRICE LEVEL AND GDP AFFECT MONEY DEMAND  FIGURE 14.2 Shifting the Demand for Money THE MONEY MARKET 14.1 R E A L - N O M I N A L P R I N C I P L E What matters to people is the real value of money or income— its purchasing power—not the face value of money or income. Changes in prices and real GDP shift the demand for money.

14. C H A P T E R 13 Money and the Banking System 14 of 28 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Macroeconomics: Principles, Applications, and Tools O’Sullivan, Sheffrin, Perez 6/e. open market operations The purchase or sale of U.S. government securities by the Fed. Open Market Operations open market purchases The Fed’s purchase of government bonds from the private sector. open market sales The Fed’s sale of government bonds to the private sector. HOW THE FEDERAL RESERVE CAN CHANGE THE MONEY SUPPLY 14.2

15. C H A P T E R 13 Money and the Banking System 15 of 28 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Macroeconomics: Principles, Applications, and Tools O’Sullivan, Sheffrin, Perez 6/e. discount rate The interest rate at which banks can borrow from the Fed. Other Tools of the Fed federal funds market The market in which banks borrow and lend reserves to and from one another. federal funds rate The interest rate on reserves that banks lend each other. CHANGING RESERVE REQUIREMENTS CHANGING THE DISCOUNT RATE HOW THE FEDERAL RESERVE CAN CHANGE THE MONEY SUPPLY 14.2 If the Fed wishes to increase the supply of money, it can reduce banks’ reserve requirements so they have more money to loan out.

16. C H A P T E R 13 Money and the Banking System 16 of 28 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Macroeconomics: Principles, Applications, and Tools O’Sullivan, Sheffrin, Perez 6/e.  FIGURE 14.3 Equilibrium in the Money Market HOW INTEREST RATES ARE DETERMINED: COMBINING THE DEMAND AND SUPPLY OF MONEY 14.3 Equilibrium in the money market occurs at an interest rate of r*, at which the quantity of money demanded equals the quantity of money supplied.

17. C H A P T E R 13 Money and the Banking System 17 of 28 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Macroeconomics: Principles, Applications, and Tools O’Sullivan, Sheffrin, Perez 6/e.  FIGURE 14.4 Federal Reserve and Interest Rates HOW INTEREST RATES ARE DETERMINED: COMBINING THE DEMAND AND SUPPLY OF MONEY 14.3 Changes in the supply of money will change interest rates.

18. C H A P T E R 13 Money and the Banking System 18 of 28 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Macroeconomics: Principles, Applications, and Tools O’Sullivan, Sheffrin, Perez 6/e. Interest Rates and Bond Prices HOW OPEN MARKET OPERATIONS DIRECTLY AFFECT BOND PRICES GOOD NEWS FOR THE ECONOMY IS BAD NEWS FOR BOND PRICES HOW INTEREST RATES ARE DETERMINED: COMBINING THE DEMAND AND SUPPLY OF MONEY 14.3 Bond prices rise as interest rates fall. Increased money demand will increase interest rates.

19. C H A P T E R 13 Money and the Banking System 19 of 28 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Macroeconomics: Principles, Applications, and Tools O’Sullivan, Sheffrin, Perez 6/e. Lags in Monetary Policy Influencing Market Expectations: From the Federal Funds Rate to Interest Rates on Long-Term Bonds MONETARY POLICY CHALLENGES FOR THE FED 14.5 Inside lags are the time it takes for policymakers to recognize and implement policy changes. Outside lags are the time it takes for policy to actually work. It is important to recognize that the Fed directly controls only very short-term interest rates in the economy, not long-term interest rates. For the Fed to control investment spending, it must also somehow influence long-term rates. It can do this indirectly by influencing short- term rates.

20. C H A P T E R 13 Money and the Banking System 20 of 28 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Macroeconomics: Principles, Applications, and Tools O’Sullivan, Sheffrin, Perez 6/e. Riksbankens styrning av dagslåneräntan Dagslåneräntan, % Banker placerar hos RiksbankenBanker lånar av Riksbanken Reporäntan (2,00%) Inlåningsränta (golvet) Utlåningsränta (taket) (2,75%) (1,25%) Finjusteringar +/- 10 räntepunkter Bankers låne- eller placeringsbehov hos riksbanken

21. C H A P T E R 13 Money and the Banking System 21 of 28 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Macroeconomics: Principles, Applications, and Tools O’Sullivan, Sheffrin, Perez 6/e. 21 Repurchase agreement Antag att riksbanken vill tillföra likviditet till bankväsendet. Riksbanken köper statsobligationer från affärsbankerna för 100 miljoner kronor, med villkor att bankerna köper tillbaks dessa obligationer efter en vecka till priset av 100,1 miljoner SEK. Effektiva årsräntan blir 5,2%. Denna sk reporäntan styr dagslåneräntan som styr de korta räntorna.

22. C H A P T E R 13 Money and the Banking System 22 of 28 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Macroeconomics: Principles, Applications, and Tools O’Sullivan, Sheffrin, Perez 6/e. 22 Effekter av en räntehöjning Förväntningar om reporäntan Reporäntehöjning Lägre förväntad lönsamhet hos företag Svårare få krediter – lägre investeringar Minskad efterfrågan Lägre inflation Marknadsräntorna stiger Starkare växelkurs Minskad konsumtion Minskade investeringar Inflationsförväntningar Minskad export – ökad import Lägre importpriser KREDITKANALENRÄNTEKANALEN VÄXELKURSKANALEN

23. C H A P T E R 13 Money and the Banking System 23 of 28 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Macroeconomics: Principles, Applications, and Tools O’Sullivan, Sheffrin, Perez 6/e. BEYOND PURCHASING TREASURY SECURITIES APPLYING THE CONCEPTS #1: How has the Fed recently expanded its role in financial markets?? Traditionally, to expand the money supply, the Fed purchased treasury securities. It credited the reserve accounts in banks and, in part, determined the money and credit in the economy. The Fed did not intervene in security or credit markets. After the crisis of 2008, the Fed changed policy and expanded its involvement. The Fed increased its assets from less than $1 trillion to over $2 trillion. In 2010 the Fed held over $1 trillion in mortgage-backed securities. Critics suggest the Fed has crossed a political threshold that may pose risks to its long-term independence. The Fed has reduced its investments in many markets, but increased its holdings of mortgage-backed securities and is still playing a direct role in the housing market. A P P L I C A T I O N 1

24. C H A P T E R 13 Money and the Banking System 24 of 28 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Macroeconomics: Principles, Applications, and Tools O’Sullivan, Sheffrin, Perez 6/e. Looking Ahead: From the Short Run to the Long Run MONETARY POLICY CHALLENGES FOR THE FED 14.5 Monetary policy can affect output in the short run when prices are largely fixed, but in the long run changes in the money supply affect only the price level and inflation. In the long run, the Federal Reserve can only indirectly control nominal interest rates, and it can’t control real interest rates—the rate after inflation is figured in. In the next part of the book, we will explain how output and prices change over time, and how the economy makes the transition by itself from the short to the long run regardless of what the Fed does.

25. C H A P T E R 16 The Dynamics of Inflation and Unemployment 25 of 23 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Macroeconomics: Principles, Applications, and Tools O’Sullivan, Sheffrin, Perez 6/e. INFLATION AND THE VELOCITY OF MONEY 16.4 or ● quantity equation The equation that links money, velocity, prices, and real output. In symbols, we have M × V = P × y.

26. 16-26 Copyright © 2012 Pearson Prentice Hall. All rights reserved. C H A P T E R 16 The Dynamics of Inflation and Unemployment  FIGURE 16.4 The Velocity of M2, 1959–2009 INFLATION AND THE VELOCITY OF MONEY (cont’d) 16.4

27. C H A P T E R 16 The Dynamics of Inflation and Unemployment 27 of 23 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Macroeconomics: Principles, Applications, and Tools O’Sullivan, Sheffrin, Perez 6/e. INFLATION AND THE VELOCITY OF MONEY 16.4 growth rate of money + growth rate of velocity = growth rate of prices + growth rate of real output ● growth version of the quantity equation An equation that links the growth rates of money, velocity, prices, and real output.

28. www.gu.se INFLATION Allmän höjning av genomsnittlig prisnivån eller minskning av penningvärdetAllmän höjning av genomsnittlig prisnivån eller minskning av penningvärdet Mått på inflation: KonsumentprisindexMått på inflation: Konsumentprisindex –Korg med konsumtionsvaror även importerade Finns även PPI och BNP deflatorFinns även PPI och BNP deflator

29. www.gu.se INFLATION Hyperinflation, högre än 50% per månad Moderat inflation, 4-20% Låg inflation, lägre än 4%. Motsats till inflation är deflation

30. 16-30 Copyright © 2012 Pearson Prentice Hall. All rights reserved. C H A P T E R 16 The Dynamics of Inflation and Unemployment In June 2008, the consumer price index in Zimbabwe was 8 million percent higher than it was a year before. A $12 lunch in local currency cost 1.1 trillion Zimbabwe dollars. What caused Zimbabwe to suffer from this crippling hyperinflation? The simple answer is that the political and economic system began to self-destruct. HYPERINFLATION IN ZIMBABWE APPLYING THE CONCEPTS #3: What caused a severe hyperinflation to emerge recently in Zimbabwe? Zimbabwe has been ruled since 1980 by the dictator Robert Mugabe, whose policies to intervene militarily in African conflicts and expropriate white-owned farms had the cumulative effect of crippling the economy. As the economy deteriorated, tax revenues declined. Mugabe and his central bank simply resorted to printing new banknotes. Result: Hyperinflation and further deterioration of the economy as the financial system collapsed. A P P L I C A T I O N 3

31. C H A P T E R 6 Unemployment and Inflation 31 of 29 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Macroeconomics: Principles, Applications, and Tools O’Sullivan, Sheffrin, Perez 6/e. THE CONSUMER PRICE INDEX AND THE COST OF LIVING 6.4 ● Consumer Price Index A price index that measures the cost of a fixed basket of goods chosen to represent the consumption pattern of a typical consumer. The CPI index for a given year, say year K, is defined as

32. C H A P T E R 5 Measuring a Nation’s Production and Income 32 of 33 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Macroeconomics: Principles, Applications, and Tools O’Sullivan, Sheffrin, Perez 6/e. THE CONSUMER PRICE INDEX AND THE COST OF LIVING 6.4  FIGURE 6.5 Components of the Consumer Price Index (CPI) Rent and food and beverages make up 44 percent of the CPI basket. The remainder consists of other goods and services. The CPI versus the Chain Index for GDP

33. 6-33 Copyright © 2012 Pearson Prentice Hall. All rights reserved. C H A P T E R 6 Unemployment and Inflation INFLATION (cont’d) 6.5 Historical U.S. Inflation Rates  FIGURE 6.7 U.S. Inflation Rate, 1950–2009, Based on Chain-Weighted Price Index Inflation reached its highest peaks in the postwar era during the decade of the 1970s when the economy was hit with several increases in oil prices. In recent years, the inflation rate has been relatively low.

34. 34

35. 35 Inflation 2000-talet

36. C H A P T E R 6 Unemployment and Inflation 36 of 29 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Macroeconomics: Principles, Applications, and Tools O’Sullivan, Sheffrin, Perez 6/e. THE COSTS OF INFLATION 6.6 ● menu costs The costs associated with changing prices and printing new price lists when there is inflation. ● shoe-leather costs Costs of inflation that arise from trying to reduce holdings of cash. Anticipated Inflation ● hyperinflation An inflation rate exceeding 50 percent per month. Unanticipated Inflation

37. www.gu.se 37 Inflationens omfördelningseffekter Effekt på löner och inkomstfördelning => trögrörliga löner missgynnas.

38. www.gu.se 38 Inflationens omfördelningseffekter Lön Förhandling: Parterna bestämmer nominell löneutveckling i avtal utifrån önskad reallöneutveckling och förväntad inflation. –Ett exempel kan vara 5%=3%+2%. Om nu den faktiska inflationen istället blir 5% som kommer den faktisk reallöneutveckling att bli 0. - Resultat 5%=0%+5%. Vårt exempel: Reallön 0%, löntagare förlorar och arbetsgivare vinner.

39. www.gu.se 39 Varför inflation? Kort sikt –Importerad –Flaskhalsar i produktionen –Lönebildning –Ändrad priskonkurrens –Inertia Lång sikt –Penningpolitik

40. C H A P T E R 16 The Dynamics of Inflation and Unemployment 40 of 23 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Macroeconomics: Principles, Applications, and Tools O’Sullivan, Sheffrin, Perez 6/e. HYPERINFLATION 16.5 ● hyperinflation An inflation rate exceeding 50 percent per month.

41. C H A P T E R 13 Money and the Banking System 41 of 28 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Macroeconomics: Principles, Applications, and Tools O’Sullivan, Sheffrin, Perez 6/e. According to a report from the U.S. Treasury, between 53 and 66 percent of U.S. currency outstanding is held abroad. About 25 percent of the currency held abroad is located in Latin America, 20 percent in Africa and the Middle East, and about 15 percent in Asia. The remaining 40 percent is held in Europe and countries of the former Soviet Union and their trading partners. Why do foreigners want to hold U.S. dollars? They provide a safe store of value. They also provide anonymity to the holder of the currency and are accepted widely throughout the world. As long as the U.S. economy remains strong, there will always be a worldwide demand for dollars. MORE THAN HALF OF U.S. CURRENCY IS HELD OVERSEAS APPLYING THE CONCEPTS #1: What fraction of the stock of U.S. currency is held abroad? A P P L I C A T I O N 1

42. Global ekonomi, Kapitel 8, Copyright: Claes Berg & SNS Förlag 42

43. Global ekonomi, Kapitel 8, Copyright: Claes Berg & SNS Förlag 43

44. www.gu.se 44 Riksbanken  Ansvar för penningpolitiken  Sedelmonopol  Bankernas bank  Ansvar för betalningsväsendet  Sköter bankclearing  Förvalta valuta- och guldreserv

45. www.gu.se 45 Riksbankens sedan 1999 Upprätthålla prisstabilitet –Lagstadgat inflationsmål, 2% (tolerans om 1%) Främja ett säkert och effektivt betalningssystem Penningpolitiken styrs av en professionell direktion Förbud mot regeringsdirektiv Riksbanksfullmäktige endast en kontrollfunktion

46. C H A P T E R 13 Money and the Banking System 46 of 28 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Macroeconomics: Principles, Applications, and Tools O’Sullivan, Sheffrin, Perez 6/e. A BANKER’S BANK: THE FEDERAL RESERVE 13.3 Functions of the Federal Reserve THE FED SUPPLIES CURRENCY TO THE ECONOMY THE FED PROVIDES A SYSTEM OF CHECK COLLECTION AND CLEARING Working through the banking system, the Federal Reserve is responsible for supplying currency to the economy. Although currency is only one component of the money supply, if individuals prefer to hold currency rather than demand deposits, the Federal Reserve and the banking system will facilitate the public’s preferences. The Federal Reserve is responsible for making our system of complex financial transactions “work.” This means that when Paul writes Freda a check, the Federal Reserve oversees the banks to ensure Freda’s bank receives the funds from Paul’s bank. This is known as check clearing. As our economy moves to more electronic transactions, the Federal Reserve provides oversight over these transactions as well.

47. C H A P T E R 13 Money and the Banking System 47 of 28 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Macroeconomics: Principles, Applications, and Tools O’Sullivan, Sheffrin, Perez 6/e. A BANKER’S BANK: THE FEDERAL RESERVE 13.3 Functions of the Federal Reserve THE FED HOLDS RESERVES FROM BANKS AND OTHER DEPOSITORY INSTITUTIONS AND REGULATES BANKS THE FED CONDUCTS MONETARY POLICY ● monetary policy The range of actions taken by the Federal Reserve to influence the level of GDP or inflation. As we have seen, banks are required to hold reserves with the Federal Reserve System. The Federal Reserve also serves as a regulator to banks to ensure they are complying with rules and regulations. Ultimately, the Federal Reserve wants to ensure the financial system is safe.

48. 16-48 Copyright © 2012 Pearson Prentice Hall. All rights reserved. C H A P T E R 16 The Dynamics of Inflation and Unemployment  FIGURE 16.3 How Central Bank Independence Affects Inflation Countries in which central banks are more independent from the rest of the government have, on average, lower inflation rates. HOW THE CREDIBILITY OF A NATION’S CENTRAL BANK AFFECTS INFLATION (cont’d) 16.3