Macro-economics

International Students IB191

Dr. XUEMEI LIU

Alibaba Business School，Hangzhou Normal University
20200081@hznu.edu.cn
 Review chapter 28
ü 01 | Identifying Unemployment
ü 02 | Job Search
ü 03 | Minimum-wage Laws
ü 04 | Unions and Collective Bargaining
ü 05 | The Theory of Efficiency Wages
ü 06 | Conclusion
1. labor force
the total number of workers, including both the employed and the
unemployed
2. unemployment rate
the percentage of the labor force that is unemployed
3. labor-force participation rate
the percentage of the adult population that is in the labor force
4. natural rate of unemployment
the normal rate of unemployment around which the unemployment
rate fluctuates interest in the future
5. cyclical unemployment
the deviation of unemployment from its natural rate
6. frictional unemployment
unemployment that results because it takes time for workers to
search for the jobs that best suit their tastes and skills
7. structural unemployment
unemployment that results because the number of jobs available in
some labor markets is insufficient to provide a job for everyone
who wants one
8. job search
the process by which workers find appropriate jobs given their
tastes and skills
9. Union
a worker association that bargains with employers over wages,
benefits, and working conditions
10. collective bargaining
the process by which unions and firms agree on the terms of
employment
11. efficiency wages
above-equilibrium wages paid by firms to increase worker
productivity
Chapter 29:
Monetary system（6h）
In this chapter, we begin to examine the role of money
in the economy. We discuss what money is, the various
forms that money takes, how the banking system helps
create money, and how the government controls the
quantity of money in circulation.
 CONTENTS
ü 01 | The meaning of money
ü 02 | The Federal Reserve System
ü 03 | Banks and the money supply
ü 04 | The Fed’s tools of monetary control
ü 05 | Conclusion
01 | The meaning of money
 1. The Meaning of Money
29.1 The meaning
of money • Money
29.2 The Federal
– Set of assets in an economy
Reserve System
– That people regularly use
29.3 Banks and the
money supply
– To buy goods and services from other
people
29.4 The Fed’s
tools of monetary
control
• The functions of money
– Medium of exchange
29.5 Conclusion
– Unit of account
Key concepts
– Store of value
 1. The Meaning of Money
29.1 The meaning
of money • Medium of exchange
29.2 The Federal – Item that buyers give to sellers when they
Reserve System
want to purchase goods and services
29.3 Banks and the
money supply • Unit of account
29.4 The Fed’s – Yardstick people use to post prices and
tools of monetary
control record debts

29.5 Conclusion

Key concepts
 1. The Meaning of Money
29.1 The meaning
of money • Store of value
29.2 The Federal – Item that people can use to transfer
Reserve System
purchasing power
29.3 Banks and the
money supply
• From the present to the future

29.4 The Fed’s

• Liquidity
tools of monetary
control – Ease with which an asset can be
converted into the economy’s medium of
29.5 Conclusion
exchange

Key concepts
 2.The Kinds of Money
29.1 The meaning
of money
• Commodity money
29.2 The Federal
– Money that takes the form of a commodity
Reserve System with intrinsic value
29.3 Banks and the • Gold, cigarettes
money supply
• Intrinsic value
29.4 The Fed’s
tools of monetary – Item would have value even if it were not
control
used as money
29.5 Conclusion • Gold standard - Gold as money
• Or paper money that is convertible into gold
Key concepts on demand
 2.The Kinds of Money
29.1 The meaning
of money • Fiat money
29.2 The Federal – Money without intrinsic value
Reserve System
– Used as money because of government
29.3 Banks and the
money supply decree
29.4 The Fed’s
– “This note is legal tender for all debts,
tools of monetary
control
public and private”
• Fiat
29.5 Conclusion
– Order or decree
Key concepts
 3. Money in the U.S. Economy
29.1 The meaning
of money
• Money stock
29.2 The Federal
– Quantity of money circulating in the
Reserve System economy
29.3 Banks and the
money supply
• Currency
– Paper bills and coins in the hands of the
29.4 The Fed’s
tools of monetary public
control
• Demand deposits
29.5 Conclusion
– Balances in bank accounts; depositors
can access on demand by writing a check
Key concepts
 3. Money in the U.S. Economy
29.1 The meaning
of money
• Measures of money stock
29.2 The Federal
– M1
Reserve System
• Demand deposits, Traveler’s checks
29.3 Banks and the • Other checkable deposits, Currency
money supply
– M2
29.4 The Fed’s
tools of monetary • Everything in M1
control
• Savings deposits, Small time deposits
29.5 Conclusion • Money market mutual funds
• A few minor categories
Key concepts
 3. Money in the U.S. Economy
29.1 The meaning
of money • Measures of money stock
29.2 The Federal
– M1
Reserve System
• Demand deposits, Traveler’s checks
29.3 Banks and the • Other checkable deposits, Currency
money supply
– M2
29.4 The Fed’s
tools of monetary • Everything in M1
control
• Savings deposits, Small time deposits
29.5 Conclusion • Money market mutual funds
• A few minor categories
Key concepts
 Figure 1
Two Measures of the Money Stock for the U.S. Economy
29.1 The meaning
of money

29.2 The Federal

Reserve System

29.3 Banks and the

money supply

29.4 The Fed’s

tools of monetary
control

29.5 Conclusion

Key concepts The two most widely followed measures of the money stock are M1 and M2. This
figure shows the size of each measure in January 2013.
02 | The Federal Reserve System
29.1 The meaning
of money
• The Federal Reserve (the Fed)
29.2 The Federal
– The central bank of the United States
Reserve System
• Central bank
29.3 Banks and the
money supply
– Institution designed to
• Oversee the banking system
29.4 The Fed’s
tools of monetary • Regulate the quantity of money in the
control
economy
29.5 Conclusion • The Bank of England
• The Bank of Japan
Key concepts
• The European Central Bank
29.1 The meaning
of money
• The Federal Reserve
29.2 The Federal
Reserve System – Created in 1913
29.3 Banks and the – After a series of bank failures in 1907
money supply
– Purpose: to ensure the health of the
29.4 The Fed’s
tools of monetary
nation’s banking system
control

29.5 Conclusion

Key concepts
29.1 The meaning
of money • The Federal Reserve System
29.2 The Federal – Federal Reserve Board in Washington,
Reserve System
D.C.
29.3 Banks and the
money supply – 12 regional Federal Reserve Banks
29.4 The Fed’s
• Major cities around the country
tools of monetary
control
• The presidents are chosen by each bank’s
board of directors
29.5 Conclusion

Key concepts
29.1 The meaning
of money • The Fed’s jobs
29.2 The Federal – Regulate banks and ensure the health of
Reserve System
the banking system
29.3 Banks and the
money supply
• Regional Federal Reserve Banks
• Monitors each bank’s financial condition
29.4 The Fed’s
tools of monetary • Facilitates bank transactions - clearing
control
checks
29.5 Conclusion • Acts as a bank’s bank
• The Fed – lender of last resort
Key concepts
29.1 The meaning
of money • The Fed’s jobs
29.2 The Federal – Control the money supply
Reserve System
• Quantity of money available in the economy
29.3 Banks and the • Monetary policy
money supply
– By Federal Open Market Committee (FOMC)
29.4 The Fed’s
tools of monetary • Money supply
control
– Quantity of money available in economy
29.5 Conclusion
• Monetary policy
– Setting of the money supply
Key concepts
03 | Banks and the money supply
 1. The simple case of 100% reserve banking
29.1 The meaning
of money
– All deposits are held as reserves
• Banks do not influence the supply of money
29.2 The Federal
Reserve System

29.3 Banks and the

money supply

29.4 The Fed’s

tools of monetary
control

29.5 Conclusion

Key concepts
 2. Fractional-Reserve Banking
29.1 The meaning
of money • Fractional-reserve banking
29.2 The Federal
– Banks hold only a fraction of deposits as
Reserve System
reserves
29.3 Banks and the
money supply
• Reserve ratio
– Fraction of deposits that banks hold as
29.4 The Fed’s
tools of monetary reserves
control

• Reserve requirement
29.5 Conclusion
– Minimum amount of reserves that banks
must hold; set by the Fed
Key concepts
 2. Fractional-Reserve Banking
29.1 The meaning
of money • Excess reserve
29.2 The Federal – Banks may hold reserves above the legal
Reserve System
minimum
29.3 Banks and the
money supply • Example: First National Bank
29.4 The Fed’s – Reserve ratio 10%
tools of monetary
control

29.5 Conclusion

Key concepts
 2. Fractional-Reserve Banking
29.1 The meaning
of money • Banks hold only a fraction of deposits in
29.2 The Federal
reserve
Reserve System
– Banks create money
29.3 Banks and the • Assets
money supply
• Liabilities
29.4 The Fed’s
tools of monetary – Increase in money supply
control
– Does not create wealth
29.5 Conclusion

Key concepts
 3. The Money Multiplier
29.1 The meaning
of money

29.2 The Federal

Reserve System

29.3 Banks and the

money supply

29.4 The Fed’s

tools of monetary
control

29.5 Conclusion

Key concepts
 3. The Money Multiplier
29.1 The meaning
of money • The money multiplier
29.2 The Federal
– Original deposit = $100.00
Reserve System
– First National lending = $ 90.00 [= .9 × $100.00]
29.3 Banks and the – Second National lending = $ 81.00 [= .9 × $90.00]
money supply
– Third National lending = $ 72.90 [= .9 × $81.00]
29.4 The Fed’s
tools of monetary –…
control
– Total money supply = $1,000.00
29.5 Conclusion

Key concepts
 3. The Money Multiplier
29.1 The meaning
of money • The money multiplier
29.2 The Federal – Amount of money the banking system
Reserve System
generates with each dollar of reserves
29.3 Banks and the
money supply – Reciprocal of the reserve ratio = 1/R
29.4 The Fed’s • The higher the reserve ratio
tools of monetary
control – The smaller the money multiplier
29.5 Conclusion

Key concepts
 4. Financial Crisis of 2008–2009
29.1 The meaning
of money • Bank capital
29.2 The Federal
– Resources a bank’s owners have put into
Reserve System
the institution
29.3 Banks and the
money supply
– Used to generate profit

29.4 The Fed’s

tools of monetary
control

29.5 Conclusion

Key concepts
 4. Financial Crisis of 2008–2009
29.1 The meaning
of money • Leverage
29.2 The Federal
– Use of borrowed money to supplement
Reserve System
existing funds for purposes of investment
29.3 Banks and the
money supply
• Leverage ratio
– Ratio of assets to bank capital
29.4 The Fed’s
tools of monetary
control • Capital requirement
– Government regulation specifying a
29.5 Conclusion
minimum amount of bank capital
Key concepts
 4. Financial Crisis of 2008–2009
29.1 The meaning
of money • If bank’s assets rise in value by 5%
29.2 The Federal
– Because some of the securities the bank was
Reserve System
holding rose in price
29.3 Banks and the
money supply
– $1,000 of assets would now be worth $1,050
– Bank capital rises from $50 to $100
29.4 The Fed’s
tools of monetary
control
– So, for a leverage rate of 20
• A 5% increase in the value of assets
29.5 Conclusion • Increases the owners’ equity by 100%

Key concepts
 4. Financial Crisis of 2008–2009
29.1 The meaning
of money • If bank’s assets are reduced in value by 5%
29.2 The Federal – Because some people who borrowed from the
Reserve System
bank default on their loans
29.3 Banks and the
money supply – $1,000 of assets would be worth $950
29.4 The Fed’s
– Value of the owners’ equity falls to zero
tools of monetary
control – So, for a leverage ratio of 20
• A 5% fall in the value of the bank assets
29.5 Conclusion
• Leads to a 100% fall in bank capital

Key concepts
 4. Financial Crisis of 2008–2009
29.1 The meaning
of money • If bank’s assets are reduced in value by more
29.2 The Federal than 5%
Reserve System
– Because some people who borrowed from the
29.3 Banks and the
money supply
bank default on their loans
29.4 The Fed’s
– For a leverage ratio of 20
tools of monetary
control
• The bank’s assets would fall below its liabilities
• The bank would be insolvent
29.5 Conclusion – Unable to pay off its debt holders and depositors in full

Key concepts
 4. Financial Crisis of 2008–2009
29.1 The meaning
of money • Many banks in 2008 and 2009
29.2 The Federal
– Incurred sizable losses on some of their
Reserve System
assets
29.3 Banks and the • Mortgage loans and securities backed by
money supply
mortgage loans
29.4 The Fed’s
tools of monetary
– Shortage of capital induced the banks to
control
reduce lending
• Credit crunch
29.5 Conclusion
• Contributed to a severe downturn in
Key concepts
economic activity
 4. Financial Crisis of 2008–2009
29.1 The meaning
of money • U.S. Treasury and the Fed
29.2 The Federal
– Put many billions of dollars of public funds
Reserve System
into the banking system
29.3 Banks and the • To increase the amount of bank capital
money supply
– Temporarily made the U.S. taxpayer a
29.4 The Fed’s
tools of monetary part owner of many banks
control
– Goal: to recapitalize the banking system
29.5 Conclusion • So that bank lending could return to a more
normal level - occurred by late 2009
Key concepts
04 | The Fed’s tools of monetary control
29.1 The meaning
of money • Influences the quantity of reserves
29.2 The Federal – Open-market operations
Reserve System
– Fed lending to banks
29.3 Banks and the
money supply • Influences the reserve ratio
29.4 The Fed’s – Reserve requirements
tools of monetary
control
– Paying interest on reserves
29.5 Conclusion

Key concepts
 1. How the Fed influences the
Quantity of Reserves
29.1 The meaning
of money
• (1) Open-market operations
29.2 The Federal
– Purchase and sale of U.S. government
Reserve System bonds by the Fed
29.3 Banks and the – To increase the money supply
money supply
• The Fed buys U.S. government bonds
29.4 The Fed’s
tools of monetary – To reduce the money supply
control
• The Fed sells U.S. government bonds
29.5 Conclusion – Easy to conduct
– Used more often
Key concepts
 1. How the Fed influences the
Quantity of Reserves
29.1 The meaning
of money • (2) The discount rate
29.2 The Federal – Interest rate on the loans that the Fed
Reserve System
makes to banks
29.3 Banks and the
money supply – Higher discount rate
• Reduce the money supply
29.4 The Fed’s
tools of monetary
control – Smaller discount rate
• Increase the money supply
29.5 Conclusion

Key concepts
 2. How the Fed influences the Reserve Ratio
29.1 The meaning
of money
• (1) Reserve requirements
29.2 The Federal
– Minimum amount of reserves that banks
Reserve System must hold against deposits
29.3 Banks and the • An increase in reserve requirement
money supply
– Decrease the money supply
29.4 The Fed’s • A decrease in reserve requirement
tools of monetary
control – Increase the money supply
– Used rarely – disrupt business of banking
29.5 Conclusion
– Less effective in recent years
Key concepts
• Many banks hold excess reserves
 2. How the Fed influences the Reserve Ratio
29.1 The meaning
of money • (2) Paying interest on reserves
29.2 The Federal – Since October 2008
Reserve System
– The higher the interest rate on reserves
29.3 Banks and the
money supply • The more reserves banks will choose to hold

29.4 The Fed’s – An increase in the interest rate on

tools of monetary
control reserves
• Increase the reserve ratio
29.5 Conclusion
• Lower the money multiplier
• Lower the money supply
Key concepts
05 | Conclusion
29.1 The meaning
of money Money serves three functions.
• As a medium of exchange, it provides the item used to
29.2 The Federal
Reserve System make transactions.
• As a unit of account, it provides the way in which prices
29.3 Banks and the
money supply and other economic values are recorded.
• As a store of value, it provides a way of transferring
29.4 The Fed’s
tools of monetary
purchasing power from the present to the future.
control

29.5 Conclusion

Key concepts
29.1 The meaning
of money The Federal Reserve, the central bank of the United
States, is responsible for regulating the U.S. monetary
29.2 The Federal
Reserve System system. The Fed chairman is appointed by the president
and confirmed by Congress every four years. The
29.3 Banks and the
money supply chairman is the lead member of the Federal Open Market
Committee, which meets about every six weeks to
29.4 The Fed’s
tools of monetary
consider changes in monetary policy.
control

29.5 Conclusion

Key concepts
29.1 The meaning
of money Bank depositors provide resources to banks by depositing
their funds into bank accounts. These deposits are part of
29.2 The Federal
Reserve System a bank's liabilities.
Bank owners also provide resources (called bank capital)
29.3 Banks and the
money supply for the bank. Because of leverage (the use of borrowed
funds for investment), a small change in the value of a
29.4 The Fed’s
tools of monetary
bank's assets can lead to a large change in the value of
control the bank's capital.

29.5 Conclusion
To protect depositors, bank regulators require banks to
hold a certain minimum amount of capital.
Key concepts
29.1 The meaning The Fed controls the money supply primarily through
of money
open-market operations: The purchase of government
29.2 The Federal bonds increases the money supply, and the sale of
Reserve System
government bonds decreases the money supply.
29.3 Banks and the
money supply
The Fed also uses other tools to control the money supply.
29.4 The Fed’s It can expand the money supply by decreasing the
tools of monetary
control
discount rate, increasing its lending to banks, lowering
reserve requirements, or decreasing the interest rate on
29.5 Conclusion reserves. It can contract the money supply by increasing
the discount rate, decreasing its lending to banks, raising
Key concepts
reserve requirements, or increasing the interest rate on
reserves.
Key concepts
29.1 The meaning
of money
1. store of value
29.2 The Federal an item that people can use to transfer purchasing power from the
Reserve System
present to the future
29.3 Banks and the
money supply
2. Liquidity
the ease with which an asset can be converted into the economy's
29.4 The Fed’s
tools of monetary medium of exchange
control
3. fiat money
29.5 Conclusion money without intrinsic value that is used as money because of
government decree
Key concepts
29.1 The meaning
of money
4. Federal Reserve (Fed)
29.2 The Federal the central bank of the United States
Reserve System
5. reserve ratio
29.3 Banks and the
money supply
the fraction of deposits that banks hold as reserves
6. money multiplier
29.4 The Fed’s
tools of monetary the amount of money the banking system generates with each
control
dollar of reserves
29.5 Conclusion

Key concepts
29.1 The meaning
of money
7. bank capital
29.2 The Federal the resources a bank's owners have put into the institution
Reserve System
8. open-market operations
29.3 Banks and the
money supply
the purchase and sale of U.S. government bonds by the fed
9. discount rate
29.4 The Fed’s
tools of monetary the interest rate on the loans that the fed makes to banks
control

29.5 Conclusion

Key concepts
29.1 The meaning
of money
10. reserve requirements
29.2 The Federal regulations on the minimum amount of reserves that banks must
Reserve System
hold against deposits
29.3 Banks and the
money supply
11. federal funds rate
the interest rate at which banks make overnight loans to one
29.4 The Fed’s
tools of monetary another
control

29.5 Conclusion

Key concepts
Thanks for Your Attention
Dr. XUEMEI LIU
Alibaba Business School，Hangzhou Normal University
20200081@hznu.edu.cn
Office hour: Tuesday 15:00-17:00