1. Money and inflation

2. Money = asset regularly used to buy goods and services from other people Liquidity

3. Function Medium of exchange Unit account Store of value Wealth and money Medium of exchange (liquidity) vs. store of value

4. Kind of money Commodity money (gold, silver, cigarettes): Intrinsic value Fiat money: no intrinsic value Usually decreed by government. People have to accept such money, trust them.

5. Kind of money Currency Deposits Money aggregates: M1: currency + demanded deposits M2: M1 + saving deposits + money market mutual funds http://www.youtube.com/watch?v=DjTs-rjVkB8

6. Money and banking Fractional-reserving banking Reserve ratio Minimal reserve ratio Money multiplier = 1/reserve ratio Money multiplies in „good“ and „bad“ times – excessed reserve Liquidity trap Bank run

7. Money and banking Central bank operations: - open market operations - reserve requirements - discount rate

8. Money supply and demand Supply: determined by central bank and operations of commercial bank Demand: determined by willingness economic subject (people, firm and other corporation) to hold money. Depend on value of money.

9. Value of money = how much goods and services is possible to buy per a money unit.

10. Change of value of money If money amount changes without change of amount good and services value of money also changes.

11. Monetary neutrality Nominal variables: measured in monetary unit, influenced by monetary system. Real variables: measured in physical units, influenced by real factors (amount of labor, capital, technology ….). Classical dichotomy: separation on nominal and real variables. A change in money amount in long run does not affect real variable. However, it does in short run.

12. Monetary neutrality and quantity equation M * V = P * Y V = velocity of money, sped how money unit is used. Expected to be stable or to change due to real change (debit and credit card, internet banking). Y = amount of goods and services, determined by real factors. Change of M (amount of money) results in change of P (price level).

13. Nominal and real interest rate i = nominal rate, r = real rate, Π =rate of inflation. All in decimal shape. (1 + i) = (1 + r) * (1 + Π) i = (1 + r) * (1 + Π) – 1 r = (1 + i)/(1 + Π) - 1

14. Nominal and real interest rate For small value of inflation (till 5 – 10 %) the approximate relationship: i = r + Π r = i – Π Fisher effect: the value of nominal interest rate is determined (adjusted) by inflation rate.

15. Inflation Money growth rate is higher that money demand growth rate. Money demand growth rate is determined mostly by real factor (real GDP, technological progress, including progress affecting using of money as internet banking). Inflation = money loose its value, it is possible to buy less goods and services per money unit => inflation tax.

16. Examples of inflation Germany 1923: http://www.youtube.com/watch?v=QmZ36uA BULY http://www.youtube.com/watch?v=QmZ36uA BULY Zinbabwe 2008: http://www.youtube.com/watch?v=Jt15F21jp N8 http://www.youtube.com/watch?v=Jt15F21jp N8

17. Costs of inflation Money loose their value – not used as store of value. Shoeleather costs. Menu costs. Relativity price variability and misallocation of resources. Inflation-induced tax distortion. Confusion and inconvenience. Arbitrary redistribution of wealth.