Income Determination The Monetary Dimension - I

Overview  Keynesian Income Determination Models  Private sector Consumption demand Investment Demand Supply & demand for money  Public Sector Government expenditure Government taxes Monetary policy manipulation of money supply  International imports, exports, net exports

Money - I  C & Fair define "money" by its functions  medium of exchange  store of value  unit of account  Money & value confused  notion of money as store of value implies money ≠ value, yet other examples of "stores of value" such as paintings imply either value lies in use, or value is "monetary value"

Money - II  C & Fair's "intrinsic value"  gold --can be used for jewelry, fillings, chips  cigarettes --can be smoked  so, "intrinsic value" = value in use, or use value  C&F's two notions of value:  monetary value  use value  But what IS "monetary value"?  to say that it is value in money brings us back to concept of money itself

Money - III  Money as command  money gives command over commodities in stores  money gives command over the production of commodities  money gives command over labor, people's time  Money as social power  Money commands labor only when people cannot produce for themselves, money could not command American pioneers, independent farmers

Money - IV  Money as embodiment of social command in capitalist societies  money gives business the power to dispossess people, to force them into the labor market  money gives capitalists power to command in labor market  money gives everyone else the power to resist that command, thus:  centrality of wage struggle between business and labor

Money - V  Money & Value viewed socially  money can be seen as embodiment of value, where  "social" substance of value = labor  form of value = exchange exchange between business & labor money/value as contradiction money/value as reflexive mediation money/value as syllogistic mediation money/value as infinitude  Money as social power

Monies  Commodity money  gold, silver --has value in use, takes labor to produce  useful qualities: divisible, portable  Fiat Money  paper or credit money mandated by government  "legal tender" from gold backed money to "Silver certificates" to "Federal Reserve Notes"

Money Supply in US  There are multiple definitions  Differences based on differences in "liquidity" of various means of exchange  Degree of "liquidity" = facility of use in exchange  M1 = coin, currency, demand deposits, travelers checks, other checkable deposits  M2 = M1 + savings accounts, money market accounts, etc.  Most money = credit money

Banks  Banks are "financial intermediaries"  financial intermediaries  take in large number of small deposits  make smaller number of larger loans Deposits BANKS Loans

Bank Accounting AssetsLiabilities Reserves Loans Total Deposits Net worth or Capital Total Net worth = Assets - liabilities Totals must always balance

Bank Creation of Money  Money = coin, currency, demand deposits, etc., etc.  Bank receives deposits  Bank can loan out most of deposits (except for reserves)  Bank loans are deposited,  increasing total deposits and total amount of money

Money Multiplier  Question: Repeated loaning of deposited money and depositing of loaned money will result in what increase in the money supply?  Answer: initial deposit multiplied by "money multiplier"  Money multiplier = 1 Required Reserve Ratio

Federal Reserve System  US "Central Bank"= Fed  System = 12 regional banks  Board of governors  Chairman of the Federal Reserve System  Functions  tries to control money supply  clears interbank payments  regulates banking system  bails out banks  tries to manage exchange rates

Tools for Controlling $ Supply  Fix, change reserve requirements  increasing  reduction in money supply  decreasing  increase in money supply  Fix, change discount rate  increasing it  reduces money supply  decreasing it  increases money supply  Open Market Operations  buying govt securities  increases money supply  selling govt securities  decreases money supply

Supply of Money (graphically)  Within Keynesian theory question of supply and demand for money always with respect to "price" of money, i.e., interest rate Ms = supply of money i Quantity of money

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