Transcript Money & Banking ECO 473 Dr. Dennis Foster
Money & Banking ECO 473 Dr. Dennis Foster
Why do we need money?
• Trade. • Problems with barter. • Can we not have money?
Why do we need banks?
• Storage. • Facilitates lending & borrowing. • How do you access funds? • Can we not have banks?
How does money relate to economic policies?
• Circular flow model. • Equation of exchange. • Monetary policy.
The circular flow model
Output markets People (households)
saving borrowing
Factor markets
Money Flows
Businesses
Real Flows
The Equation of Exchange
M•V = P•y
(money) x (velocity) = (price) x (quantity) all we spend = all we bought
Apply a little calculus . . .
%ΔM + %ΔV = %ΔP + %Δy money growth + spending habits change = inflation + real economic growth
Monetary Policy
• • •
Conducted by the Federal Reserve (FED) Controls the quantity of money available.
Uses control, primarily, to:
–
fight inflation by
M . . . what happens?
–
fight unemployment by
M . . . what happens?
Money & Banking ECO 473 Dr. Dennis Foster