Macro

Unit 6

Money and Prices in the Long Run

Overview

This Unit deals with the functions and characteristics of money, banking, tools of monetary policy and how the growth of the money supply is related to inflation. All of these are important aspects of the monetary system. Since money is used in all modern economies to conduct transactions, an understanding of what economists mean when they talk about money, how it is created and controlled, and what the consequences are of having too much or too little money in the economy, is vital to your overall understanding of macroeconomics. We begin the Unit with a preliminary look at the system of barter followed by a discussion of the concept of money. This is followed by a brief discussion of the functions of a central bank. Next, we move on to how money is created by the banking system. We conclude the Unit by discussing the instruments of monetary policy and how effective these are in the context of small, open economies like those in the Caribbean. This Unit is divided into two sessions as follows: Session 1: The Monetary System Session 2: Money Growth and Inflation • • The first session examines in detail the meaning of money. The second session examines the causes and costs of inflation

Unit 6 Learning Objectives

At the end of this Unit, you will be able to: • • • • • define barter and explain its limitations; explain the functions and characteristics of money; outline the main functions of a central bank; explain how commercial banks create money; explain the tools of monetary policy;

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discuss the effectiveness of the tools of monetary policy in a Caribbean type economy; explain the classical theory of inflation; discuss the causes and costs of inflation

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Session 1

The Monetary System

Introduction

Session 1 is the first in a two session sequence dealing with money and prices in the long run. It describes what money is and develops how the central bank controls the quantity...