Macroeconomics PDF

# Money ## Definition of Money Anything that society agrees upon as an intermediary of exchange. Emerged as a result of the disadvantages of direct barter, which include: - The difficulty of the seller and buyer being present at the same time. - Difficulty matching buyers' needs with sellers' n...

# Money ## Definition of Money Anything that society agrees upon as an intermediary of exchange. Emerged as a result of the disadvantages of direct barter, which include: - The difficulty of the seller and buyer being present at the same time. - Difficulty matching buyers' needs with sellers' needs. - Difficulty storing some goods. - Difficulty dividing some goods into small units. ## Characteristics of Money - Have general acceptance among members of society - Homogeneity of its units - Divisibility - Easy of carrying - Difficulty of damage - Difficulty in counterfeiting - Stability of the value of money. ## Functions of Money - A measure of value - Means of exchange - Store of value - Standard for deferred payments ## Quantity Theory of Money The price level increases to the increase in the quantity of money available (directly proportional). The value of money decreases to the increase of price level (inversely proportional). This means that there is an inverse proportion between the quantity of money and its value ## Exchange Equation $P = QS/V$ - $Q = Quantity of money$ - $S = Speed of money circulation$ - $P = The general level of Prices$ - $V = The volume of exchanges (goods and services produced in society during a period)$ $S = V (National product) * P / Q$ $S= (National income ) / Q$ ## National Income ### Gross Domestic Product It is the sum of the goods and services produced by society during a period of time, usually a year. ### Net Domestic Product $Net Domestic Product = Domestic Product - Capital Consumption$ ### Gross National Product $Gross National Product = Gross Domestic Product + Exports - Imports$ ### Net National Product $Net National Product = Net Domestic Product + Exports - Imports$ National income is the total returns of production factors for its participation in the production process. ## Consumption Consumption means: The amount of money spent on goods and services that achieve direct satisfaction. ### Factors Determining Consumption - Equity of income distribution - Interest rate - Desire to keep money - Price level ## Savings Saving measured by the difference between the national income and national consumption during a specific period, usually a year. ### Factors Determining Saving - Average income per capita in society - Social customs and tradition - Savings institutions ## Concepts Related to the Consumption and the Saving - The marginal propensity to consume: "It is the change in consume spending divided by the change in income" $(MPC) = \Delta C / \Delta I$ - The average propensity to consume: It is the ratio between consumption to income $(APC) = C/I$ - The marginal propensity to save: It is the change in saving as a result of the change in income $(MPS) = \Delta S / \Delta I$ - The average propensity to save: It is the ratio between save to income $(APS) = S/I$ ## Investment Investment means a new addition to the existing productive assets in society. ### Factors that Determine Investment - The prevailing interest rate in society - Investors' vision of the current economic situation and their future expectations ## The Central Bank's Means of Controlling The Money ### Open market operations It means that the central bank sells or buys government treasury bills in the market. ### Discount rate policy The central bank grants loans to commercial banks and usually charges interest on these loans at a specific rate. This rate is known as the discount rate. ### Changing the legal reserve ratio As the ability of commercial banks to create credit is inversely proportional to the legal reserve ratio imposed by the central bank. ## Economic Organizations ### 1st: Commercial Bank #### Functions of Commercial Bank: - A safe deposit box in which individuals keep their cash wealth - It collects individuals' savings and directs them to various investment aspects - Provides short- and medium-term loans, thus considered one of the most important sources of financing for various investments - Finances some types of deficits in the government budget, by purchasing treasury bills - Transfers money from one person to another, whether in the same country or in different places ### 2nd: Central Banks #### Aims of the Central Bank: It is the bank that deals in credit like other banks, but it differs from them in terms of its ownership. - Maintaining the value of the country's currency, whether internally or externally. - Influencing the quantity of money to achieve monetary and economic stability. - Government advisor on monetary, financial, and economic policies. #### Functions of the Central Bank: - **Issuing Bank:** Its the oldest function performed by the Central Bank. Central Bank monopolizes this function & no other entity shares in it. - Unifying the type of money prevalent in society. - Controlling the money supply in society. - Increasing stability & individuals' confidence in the currency. - **Bank of Banks** - Commercial banks maintain mandatory accounts with the Central Bank - The central bank lends commercial banks when they need money. ### 3rd: Specialized Banks #### Types of specialized bank: - Real Estate Banks - Agricultural banks - Industrial banks #### Characteristics of specialized banks: - Not usually receive deposits from individuals - Depend on their capital in as a large part of their resources - In addition to profit, it aims to serve national economic goals of great importance - Not limited to lends, but they often make direct investments - Often go beyond the credit role, and they provide expertise and advice