Index

A

Austrian perspective, monetary policy, 141–147

federal reserve policy, Austrian Case Study, 146–147

B

Balance sheet, federal reserve banks, 66, 92–93

Bank lending, 61–63

Bank loan, 61–62

net effects of, 62–63

Barter, 1–3

Base money equation, 66–71

derivation of, 92–95

federal reserve float, 67–69

treasury deposits (TRD), 69–71

Base money multiplier, 71–76

the currency ratio, 72–73

derivation of, 95–96

Excess reserve ratio, 74–75

numeric example, 75–76

reserve ratio requirement, 73–74

C

Central banks, 61–96

Ceteris paribus, 19

Closed market operations, 91–92

Commodity money, 5–7.
See also Money

Consumer price index (CPI), 47

CPI. See Consumer price index

Credit contracts, 44, 45

D

DACI. See Deferred availability of cash items

Deferred availability of cash items (DACI), 68

Deflation, 7–8

Discretionary monetary policy, 110–119

Great Recession of 2008-2009, federal reserve and, 117–119

interest rate targeting, U.S., 114–117

monetary targets, choice of, 113–114

transmission mechanisms, 111–113

Dynamic equation of exchange, U.S. Economy, 127

E

Equation of exchange, 13–15

dynamic version of, 20–24

hyperinflation, 23–24

quantity theory of money, 22–23

secular deflation, 21–22

secular price stability, 22

Excess reserves ratio, 74–75

Exchange, money, 1–3

F

Federal funds market, 115–116

Federal funds market transaction, 81

Federal open market committee (FOMC), 77

Federal reserve float, 67–69

Fiat money, 5–7, 97–110. See also Money

effects of, 98–102

expansion of, motives, 102–110

inflation, 98–101

lower economic growth, 102

macroeconomic management, 109–110

monetary nationalism, 98

reduced services of money, 101

seigniorage, 103–109

Fiduciary money, 5–7. See also Money

Financial markets, 25

financial flows, 29–31

participants classification in, 25–29

savings-deficit units (SDU), 28–29

savings-surplus units (SSU), 27–28

Fisher’s equation of exchange, 13–15

FOMC. See Federal open market committee

Friedman, discretionary monetary policy, 122–128

Friedman’s x-percent money growth rule, 125–126

ignorance, 123–125

politics, 122–123

road not taken, case study, 126–128

G

Gold-based money, 9

H

Hard money, 141

I

Income, 13–24

Individual tax payment, treasury, 70

Inflation, 7–8

Interest, defined, 34–35

Interest rates

bond prices and, 42–43

forward rates, 52–53

inflationary expectations, 43–49

intertemporal production and exchange, 31–35

liquidity preference theory, 56–58

marginal productivity of capital, 32

marginal rate of time preference (MRTP), 33–34

market segmentation theory, 58–60

nominal interest rate, 42–51

price of credit, 32–33

real interest rate, 35–41

term structure of, 51–60

unbiased expectations theory, 53–56

Interest rate targeting, 114–117, 128–135

nominal/real dichotomy, 128–131

term structure problem, 131–133

U.S. case study, 133–135

L

Liquidity preference theory, 56–58

Liquidity trap, 17–18

Loanable funds, market for, 36–41, 46, 144, 145

M

Marginal rate of time preference (MRTP), 33–34

Market segmentation theory, 58–60

Measures of money, 11–12

Monetary aggregates, 135–138

A Monetary History of the United States (Friedman and Schwartz), 18

Monetary policy

Austrian perspective on, 141–147

critiques of, 121–148

discount rate/discount window, 81–84

discretionary, 110–119

federal reserve, exit strategy, 136–138

and fiat money, 97–110

Friedman, rules vs. discretion, 122–128

general instruments of, 76–88

interest on bank reserves, 87–88

interest rate targeting, 128–135

issues with, 135–136

monetary aggregates and, 135–138

open market operations, 76–81

postscript, 147–148

rational expectations, 138–140

reserve ratio requirements, 84–87

Monetary systems

commodity money, 5–7

fiat money, 5–7

fiduciary money, 5–7

types of, 5–7

and value of money, 8–11

Monetary targets, choice of, 113–114

Money, 1–3

defined, 3

demand for, 15–16

and economy, 17–20

Fisher’s equation of exchange, 13–15

and income, 13–24

liquidity trap, 17–18

measures of, 11–12

properties of, 4

quantity theory of, 19–20, 22–23

and real GDP, 18–19

secondary functions of, 3

value of, 7–8

velocity of, 15–16

Money supply. See also Money

base money, 64–66

base money equation, 66–71

The base money multiplier,
71–76

model of, 63–76

MRTP. See Marginal rate of time preference

N

Nominal gross domestic product, 14

Nominal interest rate, 42–51. See also Interest rates

vector of, 49–51

O

Open market operations, 76–81

accounting for, 78–79

bank reserves, transmission of, 80–81

history, 76–77

and money supply, 79–80

process, 77–78

T-accounts, 78

Originary interest, 32

P

Policy impotence theorem, 140

PPM. See Purchasing power of money

Price level, United States, 8

Production possibility curve, 26

Purchase of bank equity, 88–89

Purchase of mortgage securities,
90–91

Purchasing power of money
(PPM), 7

Q

Quantitative easing (QE1 and QE2) transmission mechanisms, 118–119. See also Transmission mechanisms

Quantity theory of money, 19–20, 22–23. See also Money

R

Rational expectations theory, 138–140

Real interest rate, 35–41. See also Interest rates

level of, 37–39

positive real rate of interest, 36–37

risk and, 39–41

Reserve ratio requirements, 73–74, 84–87

Returns on an n-year investment, 55

S

Savings-deficit units (SDU), 28–29

Savings-surplus units (SSU), 27–28

SDU. See Savings-deficit units

Seigniorage, 103–109

with hyperinflation, 106–109

maximum amount, collection, 105–106

The Seigniorage Tax, 104–105

Selective credit controls, 88–91

purchase of bank equity, 88–89

purchase of mortgage securities, 90–91

SSU. See Savings-surplus units

T

TAF. See Term auction facility

Term auction facility (TAF), 117

Transmission mechanisms, 111–113

TRD. See Treasury deposits

Treasury deposits (TRD), 69–71

U

Unbiased expectations theory, 53–56

V

Value of money, 7–8. See also Money

monetary systems and, 8–11

percent depreciation in, 100

Velocity, of money, 15–16

W

Wealth transfers, 47, 48