Asistensi Pengantar Ekonomi

2
Pertemuan 6
Vania Lauditta Chairunnisa
Monetary Policies
• There are 3 ways central bank could influence the
money supply in the economy:
• Inflation rate policy
• Open Market Operation Policy
• Reserve Requirement Ratio Policy
Reserve Requirement Ratio Policy
• The Fed sets reserve requirements: regulations on the
minimum amount of reserves banks must hold against
deposits.
• Reducing reserve requirements would lower the reserve
ratio and increase the money multiplier.
• Hence, money supply in the economy will increase
Open Market Operation Policy
• Open-Market Operations (OMOs):the purchase and sale of U.S.
government bonds by the Fed.
• If the Fed buys a government bond from a bank, it pays by depositing
new reserves in that bank’s reserve account.
• With more reserves, the bank can make more loans, increasing the
money supply.
• To decrease bank reserves and the money supply, the Fed sells
government bonds.
Interest Rate Policy
• To influence the amount of reserves banks borrow, the Fed adjusts
the interest rate on loans the Fed makes to banks.
• If the interest rate decrease, banks will borrow more money to the
Fed
• The more banks borrow, the more reserves they have for funding new
loans and increasing the money supply.
Quantity Theory of Money
• This chapter introduces the quantity theory of money to explain one
of the Ten Principles of Economics from Chapter 1:

Prices rise when the govt prints too much money.

• Most economists believe the quantity theory is a good explanation of

the long run behavior of inflation.
The Value of Money
• P = the price level
(e.g., the CPI or GDP deflator)
P is the price of a basket of goods, measured in money.
• 1/P is the value of $1, measured in goods.
• Example: basket contains one candy bar.
• If P = $2, value of $1 is 1/2 candy bar
• If P = $3, value of $1 is 1/3 candy bar
• Inflation drives up prices and drives down the value of money.
The Quantity Theory of Money
• Developed by 18th century philosopher David Hume and the classical
economists.
• Advocated more recently by Nobel Prize Laureate Milton Friedman.
• Asserts that the quantity of money determines the value of money .
• We study this theory using two approaches:
1. A supply-demand diagram
2. An equation
Money Supply (Ms)
• In the real world, determined by the Fed, the banking system, and
consumers.
• In this model, we assume the Fed precisely controls MS and sets it at
some fixed amount.
Money Demand (Md)
• Refers to how much wealth people want to hold in liquid form.
• Depends on P:
An increase in P reduces the value of money, so more money is
required to buy g&s.
• Thus, quantity of money demanded is negatively related to the value
of money and positively related to P, other things equal.
(These “other things” include real income, interest rates, availability
of ATMs.)
 The Money Supply-Demand Diagram

Value of Price
Money, 1/P Level, P
As the value of
money rises, the
1 1
price level falls.
¾ 1.33

½ 2

¼ 4

Quantity
of Money
 The Money Supply-Demand Diagram

Value of Price
Money, 1/P MS1 Level, P

1 1

¾ 1.33

The Fed sets MS

½ 2
at some fixed value,
regardless of P.
¼ 4

$1000 Quantity
of Money
 The Money Supply-Demand Diagram

Value of A fall in value of money Price

Money, 1/P (or increase in P) Level, P
increases the quantity
1 of money demanded: 1

¾ 1.33

½ 2

¼ 4
MD1

Quantity
of Money
 The Money Supply-Demand Diagram

Value of P adjusts to equate Price

Money, 1/P MS1 quantity of money Level, P
demanded with
1 money supply. 1

¾ 1.33
eq’m eq’m
value A
½ 2 price
of
level
money
¼ 4
MD1

$1000 Quantity
of Money
 The Effects of a Monetary Injection

Value of Price
Money, 1/P MS1 MS2 Level, P

1 Fed
Suppose the 1
Then the value
increases the of money falls,
money supply.
¾ and P rises.
1.33
A
½ 2
eq’m eq’m
value B
¼ 4 price
of MD1 level
money
$1000 $2000 Quantity
of Money
 A Brief Look at the Adjustment Process
Result from graph: Increasing MS causes P to rise.
How does this work? Short version:
• At the initial P, an increase in MS causes an
excess supply of money.
• People get rid of their excess money by spending it on g&s or
by loaning it to others, who spend it. Result: increased
demand for goods.
• But supply of goods does not increase,
so prices must rise.
(Other things happen in the short run, which we will
study in later chapters.)
Real vs. Nominal Variables
• Nominal variables are measured in monetary units.
Examples: nominal GDP,
nominal interest rate (rate of return measured in $)
nominal wage ($ per hour worked)

• Real variables are measured in physical units.

Examples: real GDP,
real interest rate (measured in output)
real wage (measured in output)
Real vs. Nominal Variables
Prices are normally measured in terms of money.
• Price of a compact disc: $15/cd
• Price of a pepperoni pizza: $10/pizza
A relative price is the price of one good relative to
(divided by) another:
• Relative price of CDs in terms of pizza:

price of cd $15/cd
= = 1.5 pizzas per cd
price of pizza $10/pizza
Relative prices are measured in physical units,
so they are real variables.
Real vs. Nominal Wage
An important relative price is the real wage:
W = nominal wage = price of labor, e.g., $15/hour
P = price level = price of g&s, e.g., $5/unit of output
Real wage is the price of labor relative to the price
of output:

W $15/hour
= = 3 units output per hour
P $5/unit of output
The Classical Dichotomy
• Classical dichotomy: the theoretical separation of
nominal and real variables
• Hume and the classical economists suggested that
monetary developments affect nominal variables but
not real variables.
• If central bank doubles the money supply,
Hume & classical thinkers contend:
• all nominal variables—including prices—
will double.
• all real variables—including relative prices—
will remain unchanged.
The Neutrality of Money
• Monetary neutrality: the proposition that changes
in the money supply do not affect real variables
• Doubling money supply causes all nominal prices
to double; what happens to relative prices?
• Initially, relative price of cd in terms of pizza is

price of cd $15/cd
= = 1.5 pizzas per cd
price of pizza $10/pizza
The relative price
 After nominal prices double, is unchanged.
price of cd $30/cd
= = 1.5 pizzas per cd
price of pizza $20/pizza
The Neutrality of Money
 Monetary neutrality: the proposition that changes
in the money supply do not affect real variables
• Similarly, the real wage W/P remains unchanged, so
• quantity of labor supplied does not change
• quantity of labor demanded does not change
• total employment of labor does not change
• The same applies to employment of capital and
other resources.
• Since employment of all resources is unchanged,
total output is also unchanged by the money supply.
The Neutrality of Money
• Most economists believe the classical dichotomy and
neutrality of money describe the economy in the long
run.
• In later chapters, we will see that monetary changes
can have important short-run effects
on real variables.
The Velocity of Money
• Velocity of money: the rate at which money changes
hands
• Notation:
P x Y = nominal GDP
= (price level) x (real GDP)
M = money supply
V = velocity
• Velocity formula: PxY
V =
M
The Velocity of Money
PxY
Velocity formula: V =
M
Example with one good: pizza.
In 2012,
Y = real GDP = 3000 pizzas
P = price level = price of pizza = $10
P x Y = nominal GDP = value of pizzas = $30,000
M = money supply = $10,000
V = velocity = $30,000/$10,000 = 3
The average dollar was used in 3 transactions.
The Quantity Equation
PxY
Velocity formula: V =
M
• Multiply both sides of formula by M:
MxV = PxY
• Called the quantity equation
The Quantity Theory in 5 Steps
Start with quantity equation: M x V = P x Y
1. V is stable.
2. So, a change in M causes nominal GDP (P x Y)
to change by the same percentage.
3. A change in M does not affect Y:
money is neutral,
Y is determined by technology & resources
4. So, P changes by same percentage as
P x Y and M.
5. Rapid money supply growth causes rapid inflation.
Hyperinflation
• Hyperinflation is generally defined as inflation exceeding 50% per
month.
• Recall one of the Ten Principles from Chapter 1:
Prices rise when the government
prints too much money.
• Excessive growth in the money supply always causes hyperinflation.
The Fisher Effect
• Rearrange the definition of the real interest rate:

Nominal Inflation Real

= +
interest rate rate interest rate

 The real interest rate is determined by saving &

investment in the loanable funds market.
 Money supply growth determines inflation rate.
 So, this equation shows how the nominal interest
rate is determined.
The Fisher Effect
Nominal Inflation Real
= +
interest rate rate interest rate

 In the long run, money is neutral:

a change in the money growth rate affects
the inflation rate but not the real interest rate.
 So, the nominal interest rate adjusts one-for-one
with changes in the inflation rate.
 This relationship is called the Fisher effect
after Irving Fisher, who studied it.
Monetary Policies by Central Bank
• There are 3 ways central bank could influence the
money supply in the economy:
• Inflation rate policy
• Open Market Operation Policy
• Reserve Requirement Ratio Policy
Reserve Requirement Ratio Policy
• The Fed sets reserve requirements: regulations on the
minimum amount of reserves banks must hold against
deposits.
• Reducing reserve requirements would lower the reserve
ratio and increase the money multiplier.
• Hence, money supply in the economy will increase
Open Market Operation Policy
• Open-Market Operations (OMOs):the purchase and sale of U.S.
government bonds by the Fed.
• If the Fed buys a government bond from a bank, it pays by depositing
new reserves in that bank’s reserve account.
• With more reserves, the bank can make more loans, increasing the
money supply.
• To decrease bank reserves and the money supply, the Fed sells
government bonds.
Interest Rate Policy
• To influence the amount of reserves banks borrow, the Fed adjusts
the interest rate on loans the Fed makes to banks.
• If the interest rate increase, banks will borrow more money to the
Fed
• The more banks borrow, the more reserves they have for funding new
loans and increasing the money supply.
Contoh Soal
• SOAL 1
a) Jelaskan fungsi-fungsi uang!
b) Indentifikasi fungsi uang pada contoh aset berikut:
i. Uang kertas berdenominasi rupiah
ii. Logam mulia
iii. Buku teks Principle of Economics oleh Mankiw Edisi 7 yang diimpor dari
Amerika Serikat seharga Rp 2.8 juta
iv. Koleksi barang antik
Solusi
a) Fungsi-fungsi uang:
i. Medium of exchange (medium of payment)—uang sebagai alat
pembayaran yang diterima dalam bertransaksi. Penjual melepas
barang/jasa yang dijual dan menerima uang tersebut; dan pembeli
memperoleh barang/jasa yang diinginkan. Medium of exchange ini
mengeliminasi double coincidence of wants
ii. Unit of account—uang—uang digunakan sebagai quotation barang/jasa
dalam satuan moneter
iii. Store of value—uang sebagai penyimpan nilai bagi asset yang dapat
memindahkan (transport) purchasing power dari waktu ke waktu.
Solusi
b) Indentifikasi fungsi uang pada aset berikut:
i. Uang kertas berdenominasi rupiah
Medium of exchange, store of value, dan unit of account
ii. Logam mulia
Store of value
iii. Buku teks Principle of Economics oleh Mankiw Edisi 7 yang diimpor dari
Amerika Serikat seharga Rp 2.8 juta
Unit of account
iv. Koleksi barang antik
Store of value
Contoh Soal
• SOAL 2
Dengan menggunakan grafik, jelaskan apa yang terjadi terhadap jumlah
uang yang ditawarkan (Ms), jumlah uang yang diminta (Md), nilai dari
uang (value of money), dan tingkat harga apabila:
a) Bank Indonesia menjual surat berharganya.
b) Masyarakat mengurangi jumlah uang yang dipegang (hold less cash)
Solusi
a) Bank Indonesia menjual surat berharganya.

Jika BI menjual surat berharganya, Ms

akan turun yang ditunjukkan oleh
shifting kurva MS ke kiri, dari MS2 ke
MS1. Akibatnya value of money (1/P)
naik—dari Old Value ke New Value-- dan
tingkat harga turun. Md tetap.
Solusi
b) Masyarakat mengurangi jumlah uang yang dipegang (hold less cash)

Jika masyarakat mengurangi jumlah uang

yang dipegang, kurva Md bergeser ke kiri,
dari Money Demand 1 ke Money Demand
2. Ms tetap. Penurunan permintaan uang
(money demand) akan membawa value of
money (1/P) turun, dari old value ke new
value, dan tingkat harga meningkat.
Contoh Soal
• SOAL 3
Diketahui persamaan kuantitas uang (quantity of money equation) M × V = P × Y
dimana M adalah kuantitas uang, , V adalah velositas uang, P adalah tingkat harga,
dan Y adalah kuantitas output yang dihasilkan perekonomian.
a) Jika pada tahun 2017 diketahui kuantitas uang = 3.000, tingkat harga = 2,
kuantitas output = 6.000 hitung PDB nominal dan velositas uang dalam
perekonomian Hipotetis.
b) Jika pada tahun berikutnya, 2018, diketahui bahwa kuantitas uang Negara
Hipotetis meningkat menjadi 4500. Dengan mengasumsikan velositas dan
output tetap seperti pada tahun 2017 (butir b), hitung tingkat harga.
c) Hitung pertumbuhan uang dan inflasi 2018 dari perekonomian Hipotetis.
d) Kesimpulan apa yang dapat anda tarik dari situasi ekonomi Negara Hipotetis?
Solusi
a) Jika pada tahun 2017 diketahui kuantitas uang = 3.000, tingkat
harga = 2, kuantitas output = 6.000 hitung PDB nominal dan
velositas uang dalam perekonomian Hipotetis.

Jawab:

• Tahun 2017:
• PDB nominal = P Y = 2 x 6.000 = 12.000
• MV = PY  V = PY/M = 12.000/3.000 = 4
Solusi
b) Jika pada tahun berikutnya, 2018, diketahui bahwa kuantitas uang
Negara Hipotetis meningkat menjadi 4500. Dengan mengasumsikan
velositas dan output tetap seperti pada tahun 2017 (butir b), hitung
tingkat harga.
Jawab:

• Tahun 2018:
• MV = PY  P = MV/Y = (4.500 x 4 )/6000 = 3
Solusi
c) Hitung pertumbuhan uang dan inflasi 2018 dari perekonomian
Hipotetis.

Jawab:

• Inflasi = (P2018-P2017)/ P2017 x 100% = (3-2)/2 x 100% = 50%

• Pertumbuhan uang = (M2018-M2017)/ M2017 x 100% = (4.500-
3.000)/3.000 x 100% = 50%
Solusi
d) Kesimpulan apa yang dapat anda tarik dari situasi ekonomi Negara
Hipotetis?

Jawab:
Dengan mengasumsikan bahwa tidak ada perubahan velositas dan
output, maka tingkat inflasi Negara Hipotetis sama dengan
pertumbuhan uangnya, yaitu 50%.
Contoh Soal
• SOAL 4
Fender Island Republic, a small new country in the Caribbean Islands, has 20 billion of paper money worth FID
1,000 each and 50 billion coins worth FID 100 each.
Questions:
a) If the entire population hold money in the form of currency, what will be the supply of money in the
country? [3 points]
b) Suppose that 60 percent of the money is saved as demand deposits while the rest is still held as currency.
If Bank of Fender (BoF), the country’s central bank, decides a 100 percent reserve ratio, what will be the
supply of money in the country? [3 points]
c) If Bank of Vamos then changes its policy, allowing a reserve ratio of 10 percent, how will it affect the
supply of money in the country? What will be the supply of money? [3 points]
d) Describe 2 other quantitative policies that can be used by BoF to control the money supply. Explain why
BoF may not have full control on the money supply. [4 points]
e) Suppose that the money supply of the country is FID 25 trillion, while the nominal GDP is FID 5,000
trillion and its real GDP is 2,500 trillion. What is the price level and what is the velocity of money? [3
points]
f) Suppose the velocity is constant and the economy’s output of goods and services rises by 5 percent each
year. If BoF aims to keep the money supply constant, what will happen to the nominal GDP and the price
level next year? [3 points]
g) Suppose BoF wants to have a zero inflation, how much money supply should BoF set next year? [3 points]
Solusi
• If the entire population hold money in the form of currency, what will
be the supply of money in the country? [3 points]

• Jawab:
• Supply of money = (20 billion x 1.000) + (50 billion x 100) = 20.000
billion + 5000 billion = 25.000 billion
Solusi
• Suppose that 60 percent of the money is saved as demand deposits
while the rest is still held as currency. If Bank of Fender (BoF), the
country’s central bank, decides a 100 percent reserve ratio, what will
be the supply of money in the country? [3 points]

• Jawab:
• 15.000 billion is saved as demand deposits and 10.000 billion is saved
as currency. Since the reserve ratio is 100%, the money multiplier is 1
and the money supply is:
• Ms = 15.000 + 10.000 = 25.000
Solusi
• If Bank of Vamos then changes its policy, allowing a reserve ratio of 10
percent, how will it affect the supply of money in the country? What
will be the supply of money? [3 points]

• Jawab:
• 15.000 billion is saved as demand deposits and 10.000 billion is saved
as currency.
• Reserve ratio = 10%, then the money multiplier = 1/R = 1/0.1 = 10
• Money supply = 10.000 + (15.000 x 10) = 10.000 + 150.000 = 160.000
Solusi
• Describe 2 other quantitative policies that can be used by BoF to control the
money supply. Explain why BoF may not have full control on the money supply. [4
points]

• Jawab:
• Other quantitative policies that can be used: interest rate policy, open market
operation policy
• BoF may not have full control on the money supply, because:
• If households hold more of their money as currency, banks have fewer reserves, make fewer
loans, and money supply falls
• If banks hold more reserves than required, they make fewer loans, and money supply falls
• Yet, BoF can compensate for household and bank behaviour to retain fairly precise control
over the money supply
Solusi
• Suppose that the money supply of the country is FID 25 trillion, while
the nominal GDP is FID 5000 trillion and its real GDP is 2500 trillion.
What is the price level and what is the velocity of money? [3 points]

• Jawab:
• MxV=PxY
• M = 25 trillion, P x Y = 5000 trillion, Y = 2500 trillion
• Price level = (P x Y)/ Y = 5000/2500 = 2
• Velocity of Money = (P x Y)/M = 5000/25 = 200