Transcript Choice, Change, Challenge, and Opportunity
CPI&WPI, Money, AND Banks
物價指數 , 貨幣與銀行
CHAPTER 22, 26
The Consumer Price Index
消費者物價指數 消費者物價指數（ CPI ）是應用最廣泛的通貨膨脹指標，也是 各國央行十分關切的經濟數據。
CPI
的計算方式是，就消費者的立場，衡量一籃固定財貨與勞 務的價格，並與某個基期間的物價水準作比較。舉例來說，
1999
年
7
月份的物價水準為
130.5
，這意味該籃固定財貨與勞 務的價格高於基期水準達
30.5%
。比較兩段不同期間的
CPI
， 我們便可以知道該期間物價上漲幅度。
The Consumer Price Index
消費者物價指數 For a simple economy that consumes only oranges and haircuts, we can calculate the CPI.
The CPI basket is 10 oranges and 5 haircuts.
Item
Oranges
Quantity
10
Price
$1.00
Haircuts 5 $8.00
Cost of CPI basket at base period prices
Cost of CPI basket
$10 $40 $50
The Consumer Price Index
消費者物價指數 This table shows the prices in the base period.
The cost of the CPI basket in the base period was $50.
Item
Oranges
Quantity
10
Price
$1.00
Haircuts 5 $8.00
Cost of CPI basket at base period prices
Cost of CPI basket
$10 $40 $50
The Consumer Price Index
消費者物價指數 This table shows the prices in the current period.
The cost of the CPI basket in the current period is $70.
Item
Oranges
Quantity
10
Price
$2.00
Haircuts 5 $10.00
Cost of CPI basket at base period prices
Cost of CPI basket
$20 $50 $70
The Consumer Price Index
消費者物價指數 The CPI is calculated using the formula: CPI = (Cost of basket in current period/Cost of basket in base period) 100.
Using the numbers for the simple example, the CPI is CPI = ($70/$50) 100 = 140.
The CPI is 40 percent higher in the current period than in the base period.
The Consumer Price Index
消費者物價指數
Measuring Inflation
The main purpose of the CPI is to measure inflation.
The
inflation rate
通膨率 is the percentage change in the price level from one year to the next.
The inflation formula is: Inflation rate = [(CPI this year – CPI last year)/CPI last year] 100.
The Consumer Price Index
消費者物價指數 Figure 22.13 shows the CPI and the inflation rate, 1973 – 2003.
Wholesale Price Index
躉售物價指數 躉售物價指數是用來衡量生產者所面對的採購品的物價狀 況衡量指標 , 即它是從生產者的層面來衡量物價。 WPI 所衡量的是採購物價的情況 , 因此與 CPI 最大的差異便 在於 WPI 的衡量因子中只包括財貨在內 , 不包含勞務在內 , 而 CPI 則含括了最終的商品及勞務在內。
What is Money?
何謂貨幣？
Money
is any commodity or token （憑證） that is generally acceptable as a means of payment. Money has three other functions: Medium of exchange 交易媒介 Unit of account 計算單位 Store of value 價值儲藏
What is Money?
何謂貨幣？
Medium of Exchange
A
medium of exchange
is an object that is generally accepted in exchange for goods and services.
In the absence of money, people would need to exchange goods and services directly, which is called
barter
（物物 交換） .
Barter requires a double coincidence of wants, which is rare, so barter is costly.
Unit of Account
A
unit of account
is an agreed measure for stating the prices of goods and services.
What is Money?
何謂貨幣？
Store of Value
As a
store of value
, money can be held for a time and later exchanged for goods and services.
Money in the United States Today
Money in the United States consists of Currency 通貨 Deposits 存款 at banks and other depository institutions
Currency
is the general term for bills and coins.
What is Money?
何謂貨幣？ 廣義貨幣供給 M1 and 狹義貨幣供給 M2.
M1
= 通貨＋存款貨幣（活存＋支票） .
M2
＝
M1
＋ 準貨幣 .
The main measures of money in Taiwan are M1a and M1b,M2,M3.
M1a ＝通貨＋存款貨幣（活存＋支票） M1b ＝ M1a ＋活期儲蓄存款 M2= M1b + 定存＋定儲＋郵簿儲金 M3 ＝ M2+ 信託基金
What is Money?
何謂貨幣？ The items in M1 clearly meet the definition of money; the items in M2 do not do so quite so clearly but still are quite liquid.
Liquidity
流動性 is the property of being instantly convertible into a means of payment with little loss of value.
Depository Institutions
信託機構 A
depository institution
is a firm that accepts deposits from households and firms and uses the deposits to make loans to other households and firms.
The deposits of three types of depository institution make up the nation’s money: Commercial banks 商銀 Thrift institutions 【美】互助儲蓄銀行 Money market mutual funds 貨幣市場共同基金
Depository Institutions
Commercial Banks
商銀 A
commercial bank
is a private firm that is licensed to receive deposits and make loans.
A commercial bank’s balance sheet summarizes its business and lists the bank’s assets, liabilities, and net worth.
The objective of a commercial bank is to maximize the net worth of its stockholders.
Depository Institutions
To achieve its objective, a bank makes risky loans at an interest rate higher than that paid on deposits.
But the banks must balance profit and prudence; loans generate profit, but depositors must be able to obtain their funds when they want them.
So banks divide their funds into two parts: reserves 準備金 and loans 貸款 .
Reserves
are the cash in a bank’s vault and deposits at Federal Reserve Banks （聯邦銀行 or 央行） .
Depository Institutions
Thrift Institutions
The
thrift institutions
are Savings and loan associations Savings banks Credit unions.
Depository Institutions
A
savings and loan association
(S&L) is a depository institution that accepts checking and savings deposits and that make personal, commercial, and home-purchase loans.
A
savings bank
is a depository institution owned by its depositors that accepts savings deposits and makes mainly mortgage loans 抵押借款 .
A
credit union
is a depository institution owned by its depositors that accepts savings deposits and makes consumer loans.
Depository Institutions
Money Market Mutual Funds
A
money market fund
is a fund operated by a financial institution that sells shares in the fund and uses the proceeds to buy liquid assets such as U.S. Treasury bills 國庫券 .
Depository Institutions
The Economic Functions of Depository Institutions
Depository institutions make a profit from the spread between the interest rate they pay on their deposits and the interest rate they charge on their loans. This spread exists because depository institutions Create liquidity Minimize the cost of obtaining funds Minimize the cost of monitoring borrowers Pool risk
Financial Regulation, Deregulation, and Innovation
Financial Regulation
Depository institutions face two types of regulations Deposit insurance Balance sheet rules
Financial Regulation, Deregulation, and Innovation
Deposits at banks, S&Ls, savings banks, and credit unions are insured by the Federal Deposit Insurance Corporation (FDIC). This insurance guarantees deposits in amounts of up to $100,000 per depositor. This guarantee gives depository institutions the incentive to make risky loans because the depositors believe their funds to be perfectly safe; because of this incentive balance sheet regulations have been established.
Financial Regulation, Deregulation, and Innovation
There are four main balance sheet rules Capital requirements Reserve requirements Deposit rules Lending rules
Financial Regulation, Deregulation, and Innovation
Deregulation in the 1980s and 1990s
During the 1980s many restrictions on depository institutions were lifted and distinctions between banks and others depository institutions ended.
In 1994 the Riegle-Neal Interstate Banking and Branching Efficiency Act was passed, which permits U.S. banks to establish branches in any state.
This change in the law led to a wave of bank mergers.
Financial Regulation, Deregulation, and Innovation
Financial Innovation
The 1980s and 1990s have been marked by
financial innovation
—the development of new financial products aimed at lowering the cost of making loans or at raising the return on lending. Financial innovation occurred for three reasons The economic environment--high inflation Massive technological change Avoid regulation
Financial Regulation, Deregulation, and Innovation
Deregulation, Innovation, and Money
The combination of deregulation and innovation has produced large changes in the composition of money, both M1 and M2.
How Banks Create Money
Reserves: Actual and Required
The fraction of a bank’s total deposits held as reserves is the
reserve ratio
.
The
required reserve ratio
is the fraction that banks are required, by regulation, to keep as reserves. Required reserves are the total amount of reserves that banks are required to keep.
Excess reserves
reserves.
equal actual reserves minus required
How Banks Create Money
Creating Deposits by Making Loans
To see how banks create deposits by making loans, suppose the required reserve ratio is 25 percent.
A new deposit of $100,000 is made.
The bank keeps $25,000 in reserve and lends $75,000.
This loan is credited to someone’s bank deposit.
The person spends the deposit and another bank now has $75,000 of extra deposits.
This bank keeps $18,750 on reserve and lends $56,250.
How Banks Create Money
The process continues and keeps repeating with smaller and smaller loans at each “round.” Figure 26.2 illustrates the money creation process.
The Federal Reserve System
The
Federal Reserve System
, or the Fed, is the central bank of the United States.
A
central bank
is the public authority that regulates a nation’s depository institutions and controls the quantity of money.
The Federal Reserve System
The Fed’s Goals and Targets
The Fed conducts the nation’s
monetary policy
, which means that it adjusts the quantity of money in circulation. The Fed’s goals are to keep inflation in check, maintain full employment, moderate the business cycle, and contribute toward achieving long-term growth.
In pursuit of its goals, the Fed pays close attention to interest rates and sets a target that is consistent with its goals for the
federal funds rate
, which is the interest rate that the banks charge each other on overnight loans of reserves.
The Federal Reserve System
The Structure of the Fed
The key elements in the structure of the Fed are The Board of Governors The regional Federal Reserve banks The Federal Open Market Committee.
The Federal Reserve System
The Board of Governors has seven members appointed by the president of the United States and confirmed by the Senate.
Board terms are for 14 years and overlap so that one position becomes vacant every 2 years.
The president appoints one member to a (renewable) four year term as chairman.
Each of the 12 Federal Reserve Regional Banks has a nine-person board of directors and a president.
The Federal Reserve System
Figure 26.3 shows the regions of the Federal Reserve System.
The Federal Reserve System
The
Federal Open Market Committee
(FOMC) is the main policy-making group in the Federal Reserve System.
It consists of the members of the Board of Governors, the president of the Federal Reserve Bank of New York, and the 11 presidents of other regional Federal Reserve banks of whom, on a rotating basis, 4 are voting members.
The FOMC meets every six weeks to formulate monetary policy.
The Federal Reserve System
Figure 26.4 summarizes the Fed’s structure and policy tools.
The Federal Reserve System
The Fed’s Power Center
In practice, the chairman of the Board of Governors (since 1987 Alan Greenspan) is the center of power in the Fed. He controls the agenda of the Board, has better contact with the Fed’s staff, and is the Fed’s spokesperson and point of contact with the federal government and with foreign central banks and governments.
The Federal Reserve System
The Fed’s Policy Tools
The Fed uses three monetary policy tools Required reserve ratios The discount rate Open market operations
The Federal Reserve System
The Fed sets required reserve ratios, which are the minimum percentages of deposits that depository institutions must hold as reserves.
The Fed does not change these ratios very often.
The
discount rate
is the interest rate at which the Fed stands ready to lend reserves to depository institutions.
An
open market operation
is the purchase or sale of government securities —U.S. Treasury bills and bonds—by the Federal Reserve System in the open market.
The Federal Reserve System
The Fed’s Balance Sheet
On the Fed’s balance sheet, the largest and most important asset is U.S. government securities.
The most important liabilities are Federal Reserve notes in circulation and banks’ deposits.
The sum of Federal Reserve notes, coins, and banks’ deposits at the Fed is the
monetary base
.
Controlling the Quantity of Money
How Required Reserve Ratios Work
An increase in the required reserve ratio boosts the reserves that banks must hold, decreases their lending, and decreases the quantity of money.
How the Discount Rate Works
An increase in the discount rate raises the cost of borrowing reserves from the Fed, decreases banks’ reserves, which decreases their lending and decreases the quantity of money.
Controlling the Quantity of Money
How an Open Market Operation Works
When the Fed conducts an open market operation by buying a government security, it increases banks’ reserves.
Banks loan the excess reserves.
By making loans, they create money.
The reverse occurs when the Fed sells a government security.
Controlling the Quantity of Money
Although the details differ, the ultimate process of how an open market operation changes the money supply is the same regardless of whether the Fed conducts its transactions with a commercial bank or a member of the public.
An open market operation that increases banks’ reserves also increases the monetary base.
Controlling the Quantity of Money
Figure 26.5 illustrates both types of open market operation.
Controlling the Quantity of Money
Bank Reserves, the Monetary Base, and the Money Multiplier
The
money multiplier
is the amount by which a change in the monetary base is multiplied to calculate the final change in the money supply.
An increase in currency held outside the banks is called a
currency drain
.
Such a drain reduces the amount of banks’ reserves, thereby decreasing the amount that banks can loan and reducing the money multiplier.
Controlling the Quantity of Money
The money multiplier differs from the deposit multiplier.
The deposit multiplier shows how much a change in reserves affects deposits.
The money multiplier shows how much a change in the monetary base affects the money supply.
Controlling the Quantity of Money
The Multiplier Effect of an Open Market Operation
When the Fed conducts an open market operation, the ultimate change in the money supply is larger than the initiating open market operation. Banks use excess reserves from the open market operation to make loans so that the banks where the loans are deposited acquire excess reserves which they, in turn, then loan.
Controlling the Quantity of Money
Figure 26.6 illustrates a round in the multiplier process following an open market operation.
Controlling the Quantity of Money
Figure 26.7 illustrates the multiplier effect of an open market operation.
Controlling the Quantity of Money
The Size of the Multiplier
To calculate the size of the money multiplier, first define:
R
= reserves
C
= currency in circulation
D
= deposits
M
= quantity of money
B
= monetary base
c
= ratio of currency to deposits
r
= required reserve ratio
Controlling the Quantity of Money
The quantity of money,
M
, is:
M = C + D = (1 + c)
D
The monetary base,
B
, is:
B = R + C = (r + c)
D
Divide the first equation above by the second one to get:
M/B = (1 + c)/(r + c)
or
M = [(1 + c)/(c + r)]
B
Controlling the Quantity of Money
The money multiplier is
[(1 + c)/(c + r)]
—the amount by which a change in
B
is multiplied to determine the resulting change in
M
.
With
c
= 0.5 and
r
= 0.1, the money multiplier is 1.5/0.6 = 2.5.