2015/7/8 Monetary Policy Monetary Aggregates Monetary policy aims to controlling the total money in the economy. Required Reserve Ratio e more investment activities in the real economy, and Reverse R the higher the growth, and the pressure for How do we calculate the total amount of Monetary Aggregates Monetary Aggregates Monetary Base ·Mo base money, high-powered money includes cash or assets that could quickly be converted into currency Defined as the total currency circulating in the public and the total reserve of the M1(narrow money supply) The sum of currency held by the public and banking system The central bank uses monetary policy to djust the amount of reserve of commercial and loan associations, savings banks, and credit union banks, i.e. the money supply Monetary Aggregates The Us M1 and M2 U. s Moncy Supply (IAl and M) M2 M2 comprises M1, savings(including money market deposit accounts), small-denomination time deposits(time deposits, including retail repurchase agreements, in amounts of less than 100 000 dollars), and balances in retail money arket mutual funds Economists usually use"broad money to describe the monetary aggregate M2 is the commonly used measure of broad money2015/7/8 3 Monetary Policy Easing Tightening Required Reserve Ratio ß Ý Open Market Operation Repo Reverse Repo Discount Rate ß Ý 1-13 Monetary Aggregates • Monetary policy aims to controlling the total money in the economy. • Intuitively, the more money issued, the more investment activities in the real economy, and the higher the growth, and the pressure for inflation. • How do we calculate the total amount of money in the economy? 1-14 Monetary Aggregates • Monetary Base – base money, high-powered money –Defined as the total currency circulating in the public and the total reserve of the banking system – The central bank uses monetary policy to adjust the amount of reserve of commercial banks, i.e., the money supply 1-15 Monetary Aggregates • M0 – includes cash or assets that could quickly be converted into currency • M1 (narrow money supply) – The sum of currency held by the public and transaction deposits (demand deposits) at depository institutions (commercial banks, savings and loan associations, savings banks, and credit unions) 1-16 Monetary Aggregates • M2 – M2 comprises M1, savings (including money market deposit accounts), small-denomination time deposits (time deposits, including retail repurchase agreements, in amounts of less than 100 000 dollars), and balances in retail money market mutual funds. • Economists usually use “broad money” to describe the monetary aggregate • M2 is the commonly used measure of broad money. 1-17 The US M1 and M2 1-18