Money, Banking, and Finance Chapter 11 © Dünhaupt,

Transcript:Money, Banking, and Finance Chapter 11 © Dünhaupt,:
Money, Banking, and Finance Chapter 11 © Dünhaupt, Dullien, Goodwin, Harris, Nelson, Roach, Torras Learning Goals After today‘s lecture, you will be able to: Describe the consequences of inflation and deflation. Describe the functions and types of money. Describe the measures of the money supply Explain how banks create money. Describe the categories and functions of nonbank financial institutions. Explain the concept of “speculative bubble” and illustrate it with concrete examples. Chapter 11 2 Chapter Outline Why Money? What is Money? The Banking System Money and Finance Chapter 11 3 Why Money? Why Money: Making Transactions Easier Imagine there was no money: You would need to barter If you want to get a certain good which you don‘t have and want to exchange something else, you need to find someone who wants just the opposite exchange Sometimes, goods are not easily divisible (imagine you want to get some eggs, but only have a cow) Chapter 11 5 Money and Aggregate Demand Imagine you want to buy a house or make an investment, but do not have the means to do so You go to a bank and ask for a loan If the bank gives you a loan, you will buy the house If the bank does not give you a loan or conditions are too harsh, you will walk away not buying the house Hence, if the government can influence credit conditions, it can influence aggregate demand! Chapter 11 6 Some More Basic Thoughts About Money: This, however, is only true if inflation is low to moderate In some cases, inflation becomes so high that money is not generally accepted anymore In these cases, people might resort to barter as money would lose value to quickly barter: exchange of goods, services, or assets directly for other goods, services, or assets, without the use of money. Chapter 11 7 Where Do Hyperinflations Come From? Hyperinflation usually happens if the government starts using the printing press to pay for its expenditure (because it does not manage to collect sufficient revenue) If the economy is large and growing and there are not too many newly printed bills, the money usually is just absorbed However, if the governments prints too much money, there will be hyperinflation Germany 1920s Zimbabwe in 2007 Chapter 11 8 What is the Danger of a Hyperinflation in Europe Today? No real danger Governments are not allowed to use