1. MACROECONOMICS AND THE GLOBAL BUSINESS ENVIRONMENT
1/11/2019
MACROECONOMICS AND THE GLOBAL BUSINESS ENVIRONMENT
2nd edition
Money and Prices
PowerPoint by Beth Ingram
University of Iowa
Copyright © 2005 John Wiley & Sons, Inc. All rights reserved.

2. Key Concepts Inflation Monetarism Money Neutrality Quantity Theory
Hyperinflation
Inflation Tax and Seignorage
Monetarism
Money Neutrality
Quantity Theory

3. Inflation The rate of change in the price level P(1) – P(0)
Rate of Inflation =
P(0)

4. UK Prices,

5. UK Inflation,

6. G7 Inflation,

7. Measuring Inflation Consumer Price Index (CPI)
Producers’ Price Index (PPI)
GDP Deflator
Ratio of Nominal GDP to Real GDP
Mis-measurement issues

8. Money Neutrality Price level is a yardstick
Does it matter which unit we use?
Double all prices and incomes
Is your welfare the same, better, or worse?

9. Costs of Inflation Nominal contracts Menu costs Relative price issues
Tax systems
Mortgages
Menu costs
Transactions costs associated with changing prices
Effect of changes in pricing technology (bar codes)
Relative price issues
Effect on long-run growth

10. What about deflation? Price uncertainty High real interest rates
Real burden of debt

11. Money
Money was never a big motivation for me, except as a way to keep score. The real excitement is playing the game.
Donald Trump, "Trump: Art of the Deal"
Money is a terrible master but an excellent servant.
Phineas Taylor Barnum
A billion here, a billion there - pretty soon it adds up to real money.
Senator Everett Dirksen ( )

12. Why a currency? Role of money Kinds of money Store of value
Medium of exchange
Unit of account
Kinds of money
Commodity Money
Backed currency
Fiat Currency

13. The Money Supply
M1: Currency + Traveler’s Checks + demand deposits + other checkable deposits
M2: M1 + retail money market mutual funds + savings and small time deposits + overnight repurchase agreements
M3: M2 + large time deposits + term repurchase agreements + eurodollars + institutional money market mutual funds

14. Monetary Aggregates, June 2004
Source: Board of Governors On-line Statistics

15. Money Multiplier Vault Accumulation $10 $19 $26.10 … $100 $100 $90 $71
$190
$261 …
$1000
Total Money
Base Currency M1

16. Money Multiplier = 1/(reserve requirement)
Assumes banks don’t hold excess reserves
Assumes loans make it back to bank as deposits
Assumes currency doesn’t leave country

17. Seignorage
Profit made by a government by issuing currency, especially the difference between the face value of coins and their production costs
How does it work?
Direct – print money
Indirect – print money, buy and hold government debt
Inflation Tax
Decline in value of cash holdings due to inflation
Same as seignorage if inflation rate = growth rate in currency

18. Seignorage Country % of GDP % Gov. Spending USA 0.43 1.96 Philippines
1.23
8.96
Canada
0.44
2.01
El Salvador
1.53
10.89 UK
0.47
1.28
Nigeria
1.57
11.12
France
0.55
1.39
India
1.72
11.82
Switzerland
0.62
6.74
Ecuador
2.17
15.81
Cameroon
0.64
3.38
Greece
3.13
10.51
S. Africa
0.65
2.53
Ghana
3.31
22.01
Germany
0.69
2.35
Turkey
3.58
15.20
Burundi
0.85
6.12
Bolivia
3.81
19.76
Japan
0.96
5.62
Peru
4.99
28.23
Thailand
1.09
6.30
Argentina
9.73
62.00

19. Seignorage
Gresham's law is a monetary principle stating that "bad money drives out good." In currency valuation, Gresham's Law states that if a new coin ("bad money") is assigned the same face value as an older coin containing a higher amount of precious metal ("good money"), then the new coin will be used in circulation while the old coin will be hoarded and will disappear from circulation.

20. Declining value of Money
Hyperinflation
High and persistent rate of inflation
Relationship to fiscal policy
Finance government. spending via inflation tax
Rising Inflation
Declining value of Money
People decrease money holdings by buying goods

21. HyperInflation
Hyperinflation is not a result from the dramatic increase in Money Supply  (although it certainly helps), but rather it is the loss of confidence in the currency

22. Seven Hyperinflations – 1920s and 1940s

23. The German hyperinflation 1922-23 (January 1922 =1)

25. Velocity: the circulation rate of money
Quantity Theory
MV = PY
Velocity: the circulation rate of money
Inflation is always and everywhere monetary phenomenon.
Milton Friedman

26. %M + %V = %P + %Y Assume V = constant, so %V = 0
%M = %P + %Y
%Y determined by investment, technology, etc.
%M is proportional to %P
Growth in Money Supply
Seignorage
Inflation

27. US Inflation and Money Growth

28. UK Inflation and Money Growth

29. Cross-country Inflation and Money Growth, Long Run

30. Cross-country Inflation and Money Growth, Short Run

31. Summary Inflation Money Hyperinflation Measures Costs Deflation
Definitions
Multiplier
Seignorage and Inflation Tax
Hyperinflation
Copyright © 2005 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages caused by the use of these programs or from the use of the information contained therein.