Unit #3 Macroeconomics (Money, banking, Fiscal and Monetary Policy)

Macroeconomics

the part of economics dealing with large-scale economic issues/the economy as a whole

Modern Economies needs three things to be successful

1. the rule of law

2. “Sound” money

3. A banking system

What is money?

1. store of value

2. means of exchange (bartering is not ideal)

3. A unit of account (automatically know if it’s a good deal or bad deal)

Three types of money

1. Commodity money

2. Representative Money

3. Fiat Money

commodity money

has value in and of itself e.g. Gold, silver, etc.

Representative Money

Represents something of value e.g. Gold or silver certificates

Fiat Money

it has value because the government says it has value

currency

money, bills, notes

M1

the total supply of fiat money in an economy on hand and in checking accounts

How do banks make money?

by taking money that has been deposited and loaning it out with interest

interest is expressed as a

%

Fractional Reserve Banking

Banks loan out most of the deposited money (banks are limited to how much they can reserve out)

inflation

is a rise in prices which results in money having less purchasing power

How is inflation measured

CPI: Consumer Price Index

Inflation Rate

increase in the price level of goods and services

deflation rate

decrease in the price level of goods and services

What causes inflation?

• increase in the supply of $

• “Inflation is a monetary phenomenon” (Milton Friedman)

• More money is printed/created by the government

How can the government create more money?

No gold standard

Gold has not backed up American money since, Nixon 1970

2nd thing that causes inflation

when the aggregate demand (of all consumers) for goods and services in an economy rises faster

Why is inflation bad?

Makes people poorer:

• erodes savings

• makes consumers poorer through reduced purchasing power

Adam Smith

Father of classical economics