Money and
Monetary Policy
By Angel David Aroquipa Velasquez
Checking terms
Currency
Environment
Barter
Alive
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Drawbacks
Uncertain
Storage
Light
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Publicized
Worldwide
Shredded
Counterfeits
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Lessen
Fee
Set
Loans
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Speed up
Lower
Lowering
tightens
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narrow
Distrust
Trust
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Concern
Noncash
Trusted
Trustworthy
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Timestamps
Hashes
Blockchain
Shell
Objectives
1 2 3
Examine the Identify three tools Explain how monetary
characteristics and used to control with policy tools are used
functions of money value of a given to control the
currency macroeconomic
environment
Before money we had
Barter
Barter is a voluntary
exchange of items which
are not alike or set in value
Barter is alive and well, but
has drawbacks
Drawbacks of
Barter
Uncertain connection of
producers & consumers
Uncertain valuation of
barter goods
Indivisibility of some
barter goods
Storage of excess
Characteristic of
Money
• Uniform
• Portable
Six • Acceptability
characteristics • Durable
(U.P.A.D.D.L) • Divisible
• Limited
Supply
Uniform portable
Uniform Portable
Looks the same over time Light and Flexible
Changes well publicized Metals, Cotton, Plastic
Acceptability & durable
Acceptability Durable
US Dollar is int’l reserve currency Average life of a $1 bill
(used by smaller countries to store • 6 months
value) the “Sol” is only for Perú Average life of a $1 coin
• 13 years!
$. Accepted worldwide except
(officially) by Cuba and N. Korea Made of metals, cotton, plastic, shell,
Divisible & limited supply
Divisible Limited Supply
Available in various • Small supply= High
denominations Value
• Mexico= Pesos & Centavos • Old bills shredded
• Russia= Rubles & Kopeks
• UK= Pounds & Pence
• Counterfeits increase
• India= Rupees & Paistres Quantity of Supply
• China= Yuan & Jiao
• Perú = Sol & Centimos
Three Functions of Money
Money Medium of exchange I trade 1 hour labor for
$31.25/hr + benefits
Does…
Unit of account I check prices at
several stores
Store of Value I have $2000 in my
savings
Monetary Policy
Is a process by which the monetary
authority of a country, typically the central
bank or currency board control either the
cost of very short term borrowing supply,
often targeting inflation or the interest
rate to ensure price stability and general
trust in the currency
Monetary Policy Monetary policy manipulates the
Quantity Supply of money in
circulation to lessen bad effects of
business cycles
Monetary Policy
M Policy is controlled through
•Interest Rates
•Reserve Ratios
•Bond Sales
Interest
The Federal Reserve set the Prime
Interest is a % fee paid to borrow Interest Rate,
money • PIR= the interest Federal Reserve charge large
banks for large loans via the “Discount Window”
Interest
The Federal Reserve can speed The Federal Reserve can slow
up borrowing by lowering the borrowing by raising the Prime
Prime Interest Rate Interest Rate
US Federal Reserve
Run by Board of
The Federal Governors
Reserve is
the Central Divided into 12
regions ($1 letters
Banking A-L)
System of the Made up of
United States member banks
Bank of
America
Prime Interest Rate Practice
Up Or Down? Up or Down
• The US economy is going to fast • The US economy is falling fast into
and prices are feeling inflationary recession. Prices are deflating
pressures (going up) hurting (dropping), hurting businesses. The
consumers. The Fed should… Fed should….
• Raise Interest Rates to increase • Raise Interest Rates to decrease
borrowing costs borrowing costs
• Lower Interest Rates to increase • Lower Interest Rates to decrease
borrowing costs borrowing costs
Reserve Ratio
Banks work by loaning Reserve Ratio is
out depositors money
and collecting interest the amount of
• Assuming few depositors will money banks must
need money daily keep on hand to
• Assuming loans will be
repaid on time with interest cover withdrawals.
Money Multiplier Effect
Formally called
fractional reserve
banking
Money Multiplier is the
effect of a cycle of
deposits and loans in
money creation
Reserve Ratio Practice
Increase or Decrease?
Banks are making riskier and riskier loans, and
home prices are spiking higher. The Fed should…
Increase the Reserve Decrease the Reserve
Ratio to cover Ratio to cover
possible losses possible losses
Reserve Ratio Practice
Increase or Decrease?
Despite Record Increase the reserve ratio to stimulate demand
Low Interest
rates, Home
prices continue
to drop. The Fed
should…
Decrease the reserve ratio to stimulate demand
Bond Sales
Bond Sales- Also Called
Federal Reserve Eases
Open Market US Bonds borrow
Monetary Policy though
Operations, this is the money from public for
buying US Treasury
most used monetary US gov. use.
bonds from investors
policy tool
Federal Reserve Tightens
The Fed Can fight
Monetary Policy through
inflation by Selling
selling US Treasury
Bonds
bonds to investors.
Easing/Tightening Practice
E or T? E or T?
• Economy is going too fast and • Economy is slowing and
inflation is starting to drive up unemployment is starting to rise.
prices. Should the Fed… Should the Fed…
• BUY Bonds to take money out of
circulation • BUY Bonds to put money back
• SELL Bonds to take money out of into circulation
circulation • SELL Bonds to put money back
into circulation
M1-M3
So where is the most money
in the banking system?
M1 M2 M3
• Cash and Cash • Small Value, • Large Value,
instruments Short Time Longer Time
Deposits Deposits (best
rates of interest
M1-M3
What is Bitcoin?
A peer-to-peer internet currency that allows decentralized
transfers of value between individuals and businesses.
Bitcoin vs. bitcoins
Bitcoin is the
system
bitcoins are
the units
Creating a currency from scratch
Motivation
Distrust of financial institutions
Transaction costs
Primary
concerns Transaction security
Double spends
Distrust of financial institutions
Any noncash
transaction The system forces
requires a trusted participants to
third-party trust financial
administrator— institutions that
commonly a bank are not always
or financial trustworthy.
service provider.
Transaction security
Two levels of
verification Public/private key
verification ensures
• Source is legitimate the legitimacy
• Coins are legitimate
Double spends
If the
money is
just digital
Timestamps
codes, why
not copy
and paste
Hashes
to make
more
money? Block chain
Double spends
• Timestamp
• Each transaction is packaged
and publically recorded in the
order it was carried out.
• Hash
• The time-stamped group of
transactions are given a unique
algorithmically derived number
Double spends
• Block chain
• Transactions are recorded in a
community-built record of all
transactions that acts as a
proof-of-work.
• Computers connected to the
network accept the longest
chain as accurate.
Summary
Interest Rates, Most of the money
The central Bank Reserve Ratios and in the economy is in
Money is a tool Controls Money Bond Sales are the investments, land
Supply in the Peru´ three main monetary and other long term
Tools assets
