1. Money inflation and deflation
Competencies: Being able to explain monetary functions, historical development and the role of central banks
1) Functions of money?
2) Historical Development
3) The banking system
We need money to exchange goods & services
To overcome the problems of barter money must be
4) The price of money is the interest rate
5) Role of the Central Bank and its instruments
Instruments of monetary policy
= increasing or decreasing the money supply to speed up or to slow down the economy
Open Market Policy: Central Banks influence the money supply through buying and selling securities .
Quantitative Easing: Massive Open Market Policy during recession (4 Trillion US$)
Reserve Requirements: How much do banks have to deposit with the Central bank: 2012 it was reduced from 2% to 1%
Discount Rate: Price for borrowing at the central bank is the basis: 2019 EU 0% (basis for cheap loans to encourage growth) in the US 1%
When interest rates are low: people borrow money and invest > boost up the economy
When the rates are high, the recuce borrowing
Majof Central Banks
FED: Federal Reservy System (USA) Waashington DC
IMF: International Monetary Fund, Central Bank of the central banks: Christine Lagard
ECB: European Central Bank: Mario Draghi
Austrian Central Bank: Ewald Novotny
Principles of the Austrian Central Bank:
Independence
Financing of the state is not allowed
Main Task: Monetary Policy
Main Goal: stability of prices (max. 2% inflation)
6) Inflation & Deflation
Inflation: general rise in the level of prices of goods and services:
e.g. last year $25: 27/25*100=incr. of 8%
hyperinflation: runaway inflation during which prices rise at phenomenal rates, money > worthless
Deflation: general decrease in the level of prices of goods and services