Income DeterminationThe 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

Assets Liabilities

Reserves

Loans

Total

Deposits

Net worth or Capital

Total

Net worth = Assets - liabilitiesTotals 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 moneyi

Quantity of money

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