Monetary Theory

Definition of MoneyUniqueness of MoneyFunctions of MoneyMonetary TheoryClassical View of MoneyKeynesian ViewFunctions of MoneyLiquidity of MoneyAxiom of Gross Substitution breaks down when Pm Increase or Decrease.Fractional Reserve Banking Bank A rr=%20 Assets LiabilitiesReserves$20Demand Deposit$100Loan$80Total$100$100Fractional Reserve Banking Bank B rr=%20 Assets LiabilitiesReserves$16Demand Deposit$80Loan$64Total$80Total$80Fractional Reserve Banking Bank C rr=%20 Assets LiabilitiesReserves$12.8Demand Deposit$64Loan$51.2Total$64Total$64Fractional Reserve BankingMoney Created = 80+64+51.2+ =$500Money Multiplier: m=1/rr =(1/0.20) =5 Potential MultiplierMoney Supply and Monetary BaseTools Of Monetary SupplyOpen Market Operation If Central Bank Sells Securities MB and Ms If Central Bank Buys Securities MB and Ms

Changing Reserve Ratio If rr , then, mm & Ms

Changing Discount Rate If d , then, MB and Ms If d , then, MB and Ms

Exogenous Monetary TheoryEndogenous Monetary TheoryIntermediate TargetsDesirable Properties Measurable Reliable Controble

TargetsMoney GrowthDiscount RateThe Federal Fund RateBank ReservesEclectic ApproachCredit TargetsNominal Income World Money Sup.& Ex.RaFiscal & Mont Polic. Cord.Expec. Cred. & LagIn Islamic Property Right SystemMoney and CapitalMoney, Capital & Islamic Financial SystemDefinitionRules of ExchangeMarkets Financial Market, Capital Market, Commodity MarketBanks Financial ServicesCentral Bank Financial Policy : Expansion & Contraction PolicyGovernment Financial PolicyFinancial Market

No. of securities or value of securitiesPrice of every shareAA*P*

No. of securities or amount of securitiesA*An*nDSSD

Y2D

Aggregate Supply Curve