TERMIZ UNIVERSITY OF ECONOMY AND SERVICE FACULTY OF IQTISODIYOT 1-COURSE STUDENT OF THE GROUP5-22 Jumanazarova Shaxribonuning Ingliz tili fanidan tayyorlagan TAQTIMOTI
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 Outline
Why Money?
What is Money?
The Banking System
Money and Finance
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)
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!
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.
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
What is the Danger of a Hyperinflation in Europe Today?
No real danger
Governments are not allowed to use the printing press to pay for their deficit (EU treaty)
Even (recently agreed) purchases of government bonds by the ECB are limited
Money in modern, developed economies comes into existence by other means (via the banking system)
Why is Inflation Disliked Even if it is Lower?
It redistributes from creditors to debtors
It might wipe out savings
It makes planning difficult
It hurts those with nominally fixed incomes (people on unemployment assistant, pensioners etc.)
It creates “menu” costs
What About Falling Prices – Do They Bring Problems as Well?
Deflation: when the aggregate price level falls
Wealth is redistributed from debtors to creditors
Debtors tend to be those who spend more – firms are usually debtors
This might lead to bankruptcies and problems in the banking sector
