Scot Wick Blog

  Mostly summarized from Gregory Mankiw’s Principles of Economics, 5th Ed. PART 10 Money and Prices in the Long Run Chapter 29 of 36 Money Growth and Inflation Section 4 of 29 … How is the value of money determined? The answer is supply and demand. In developing the quantity theory of money our next step is consideration of the determinants of money supply and money demand. First we’ll consider money supply. … When the Federal Reserve Bank (the Fed) sells bonds in open-market (public) operations it receives dollars in exchange. This contracts the money supply because now less money is in circulation, it’s being held at the Fed. When the Fed buys government bonds it pays out dollars to the public in exchange. This expands the money supply because now more money is in circulation. When these paid-out dollars are deposited in banks · banks hold some as reserves and loan out the rest · the money multiplier goes into effect · creating a further increase in the money supply … In this cha...

  Mostly summarized from Gregory Mankiw’s Principles of Economics, 5th Ed. PART 10 Money and Prices in the Long Run Chapter 29 of 36 Money Growth and Inflation Section 3 of 29 … Our study of inflation begins by developing the quantity theory of money. This theory is called the Classical Theory of Inflation because it was developed by some of the earliest economic thinkers. Most current economists rely on this theory to explain the long run determinants of the price level and the inflation rate. … Over the last century the price of an ice cream cone has risen from a nickel to a dollar. Why are people today willing to pay so much more money for a cone? It is possible people nowadays enjoy ice cream more? The actual reason people now pay more for ice cream and all products is over time money has become less valuable. … The first insight of inflation is it is more about the value of money than about the value of goods. When the consumer price index and other price indexes rise commenta...

  Mostly summarized from Gregory Mankiw’s Principles of Economics, 5th Ed. PART 10 Money and Prices in the Long Run Chapter 29 of 36 Money Growth and Inflation Section 2 of 29 … Most prices rise over time, this increase in the level of prices is called inflation. We have seen how economists measure the inflation rate as the percentage change in the consumer price index (CPI) and other indexes. These price indexes show over the past 70 years prices have risen an average of about 4% per year. Over 70 years, a 4% annual inflation rate results in a sixteen times increase in the price level. On average something that cost one dollar 70 years ago costs $16 now. … Inflation may seem natural and inevitable, but it is not. There were periods in the 19th century when most prices fell, an occurrence called deflation. The average price level in the U.S. economy was 23% lower in 1896 than in 1880. Deflation was a major issue in the presidential election of 1896. Farmers with large debts suffere...

  Mostly summarized from Gregory Mankiw’s Principles of Economics, 5th Ed. PART 10 Money and Prices in the Long Run Chapter 29 of 36 The Monetary System Section 01 of 29 … Chapter 30 topics The Classical Theory Of Inflation The Level Of Prices And The Value Of Money Money Supply, Money Demand, And Monetary Equilibrium The Effects Of A Monetary Injection A Look At The Adjustment Process The Classical Dichotomy And Monetary Neutrality Velocity And The Quantity Equation Money And Prices During Four Hyperinflations The Inflation Tax The Fisher Effect The Inflation Fallacy Shoeleather Costs Menu Costs Relative-Price Variability And The Misallocation Of Resources Inflation-Induced Tax Distortions Confusion And Inconvenience Inflation Causing Arbitrary Redistributions Of Wealth … … price variability kakaku hendō 価格変動 … … ChatGPT summary of Chapter 30 - Money Growth and Inflation: Chapter 30 explains sustained inflation is primarily caused by the money supply growing faster than the econom...

  Mostly summarized from Gregory Mankiw’s Principles of Economics, 5th Ed. PART 10 Money and Prices in the Long Run Chapter 29 of 36 The Monetary System Section 20 of 20 … A bank run occurs when depositors worry a bank may go bankrupt and run to the bank to withdraw their money as cash from the bank’s vault. Bank runs are an inherent problem for banks in a fractional-reserve banking system. Because a bank holds in reserve only a fraction of its deposits and loans out the rest it cannot satisfy withdrawal requests from all depositors at once. When a run occurs the bank is forced to close until · some bank loans are repaid · the Fed provides it with currency … During the Great Depression in the early 1930s there was a series of bank runs and bank closings. Households withdrew their deposits from banks, preferring to hold their money as currency at home. This reversed the process of money creation, money was destroyed rather than created. Banks told people with loans they had to repay...

  Mostly summarized from Gregory Mankiw’s Principles of Economics, 5th Ed. PART 10 Money and Prices in the Long Run Chapter 29 of 36 The Monetary System Section 19 of 20 … As discussed in previous sections, the Fed has these three tools to control the money supply, open-market operations, reserve requirements, and the discount rate. However, the Fed's money supply control is not complete. The Fed faces two problems beyond its control. Each arises because the money supply is created by the fractional-reserve banking system. … #1 problem is the Fed does not control the amount of money households decide to keep as deposits in banks. The more money households deposit at banks · the more reserves (money held at banks to pay depositors’ demands for their money rather than loaned out) banks have · the more money the banking system can create by making loans Conversely, the less money households deposit at banks · the less reserves banks have · the less money the banking system can create ...

  Mostly summarized from Gregory Mankiw’s Principles of Economics, 5th Ed. PART 10 Money and Prices in the Long Run Chapter 29 of 36 The Monetary System Section 18 of 20 … The Fed has three tools for changing the money supply -1- open-market operations -2- reserve requirements -3 - the discount rate … -3 - The Discount Rate The discount rate is the interest rate on loans the Fed makes to banks. A bank borrows from the Fed at the discount rate when its reserves are too low to meet its reserve requirements. This can happen because the bank · has made too many loans · has had unexpectedly large withdrawals When the Fed makes such a loan to a bank · the banking system now has more reserves · these additional reserves allow banks to make new loans, creating more money … By changing the discount rate the Fed can alter the money supply. A higher discount rate · reduces the amount of reserves banks have · which reduces bank loans and the money supply A lower discount rate · increases the ...

  Mostly summarized from Gregory Mankiw’s Principles of Economics, 5th Ed. PART 10 Money and Prices in the Long Run Chapter 29 of 36 The Monetary System Section 17 of 20 … The Fed has three tools for changing the money supply -1- open-market operations -2- reserve requirements -3 - the discount rate … -2- Reserve Requirements The Fed can increase and decrease the money supply by changing bank reserve requirements. These are regulations on the minimum reserves amount banks must hold as a percentage of deposits. Reserve requirements influence how much money banks can create with each dollar of reserves. … For example · if the Fed reserve requirement is 10% · if people have deposited a total of $100 in a bank · the bank must keep $10 in reserves · and can loan out $90 · thereby increasing the money supply by $90 … An increase in reserve requirements means · banks must hold more reserves · banks can loan out less of each dollar deposited at them As a result, it · lowers the money multi...

Mostly summarized from Gregory Mankiw’s Principles of Economics, 5th Ed. PART 10 Money and Prices in the Long Run Chapter 29 of 36 The Monetary System Section 16 of 20 … The Federal Reserve (Fed) controls the economy’s money supply. The Fed's control is indirect because banks create money not the Fed. So, when the Fed decides to change the money supply, it must consider how its actions will affect the banking system. The Fed has three tools for changing the money supply -1- open-market operations -2- reserve requirements -3- the discount rate … -1- Open-Market Operations The Fed conducts open-market operations when it buys and sells government bonds that the Treasury has previously sold to the public. A- To increase the money supply, the Fed instructs the bond traders at the New York Fed bank to buy government bonds from the public. The new dollars created from air by the Fed to pay for the bonds increase the number of dollars in the economy. The new dollars received by those in th...

  Mostly summarized from Gregory Mankiw’s Principles of Economics, 5th Ed. PART 10 Money and Prices in the Long Run Chapter 29 of 36 The Monetary System Section 15 of 20 … The process of money creation by banks can continue forever, but not an infinite amount. If there is an initial deposit at a bank of $100 with a bank reserve requirement of 10%, ultimately an additional $900 of money can be created. … The amount of money the banking system generates with each dollar of reserves is called the money multiplier. Per Figure B example, with a 0.10 reserve ratio · the money multiplier is 1/.1 = 10 · $100 of reserves (initial deposit) eventually can create $900 more money created = $1000 total The money multiplier is the reciprocal of the reserve ratio. In the example · reserve requirement is 0.1 so the money multiplier is 1/.1 = 10 · $100/.1 = $100 x 10 = $1000 total money end result, original $100 deposit + $900 created money. … This formula illustrates how the amount of money banks...

  Mostly summarized from Gregory Mankiw’s Principles of Economics, 5th Ed. PART 10 Money and Prices in the Long Run Chapter 29 of 36 The Monetary System Section 14 of 20 ... The creation of money continues after First National Bank has made the first loan. Per Figure T2 · initial deposit of $100 has been made at First National Bank · First National keeps $10 as reserves in its vault · then it loans out $90 Suppose borrower A who got the $90 loan from First National · uses the $90 to purchase something from someone · who in turn deposits the currency in a different Second National Bank Per Figure T3 · Second National also has a reserve ratio of 10% · it keeps currency assets of $9 in reserve · and makes a $81 loan to a borrower B Second National Bank thereby has created an additional $81 of money. Per Figure T4 · this $81 is next deposited by borrower B in Third National Bank · which also has a reserve ratio of 10% · this bank keeps $8.10 currency in reserve in its vault · and makes...

  Mostly summarized from Gregory Mankiw’s Principles of Economics, 5th Ed. PART 10 Money and Prices in the Long Run Chapter 29 of 36 The Monetary System Section 13 of 20 … Suppose First National Bank decides on a reserve ratio of 1/10, or 10%. It keeps 10% of its deposits in reserve. It loans out the 90% rest, to one Borrower A. First National Bank’s new T-account is shown in Figure T2. … First National Bank still has $100 in liabilities because making the loan did not alter the bank's obligation to its depositors. Now the bank has two kinds of assets · $10 of reserves in its vault · $90 of loans outstanding The $90 loan is · a liability of the Borrower A who took out the loan · assets of the bank, because Borrower A will later repay the bank First National's assets still equal its liabilities at $100. … Before First National makes any loans, the money supply is the $100 of deposits in the bank. When First National makes the $90 loan this is a money creation of $90 and the m...

  Mostly summarized from Gregory Mankiw’s Principles of Economics, 5th Ed. PART 10 Money and Prices in the Long Run Chapter 29 of 36 The Monetary System Section 12 of 22 … The First National Bank bankers ponder their policy of 100% reserve banking. Keeping all money depositors have deposited at their bank idle in their vaults seems unnecessary. All the depositors will not want to withdraw all their money at one time. Why not lend some out and earn a profit by charging interest on the loans? Families buying houses, firms building new factories, and college students paying tuition would want to take out loans. … First National Bank would have to keep some reserves in its vault so currency is available when depositors want to make withdrawals. If the inflow of new deposits is about the same as the outflow of withdrawals, First National Bank would need to keep only a fraction of its deposits in reserve. … The First National Bank bankers decide to make loans and not hold 100% of deposit...