Income Determination
The Monetary Dimension - I
Overview
$ Keynesian Income Determination Models

Private sector
 Consumption demand
 Investment Demand
 Supply


& demand for money
Public Sector
 Government expenditure
 Government taxes
 Monetary policy manipulation of money supply
International
 imports, exports, net exports
Money - I
$ C & Fair define "money" by its functions



medium of exchange
store of value
unit of account
$ Money & value confused

notion of money as store of value implies money ≠
value, yet other examples of "stores of value" such as
paintings imply either value lies in use, or value is
"monetary value"
Money - II
$ C & Fair's "intrinsic value"



gold --can be used for jewelry, fillings, chips
cigarettes --can be smoked
so, "intrinsic value" = value in use, or use value
$ C&F's two notions of value:


monetary value
use value
$ But what IS "monetary value"?

to say that it is value in money brings us back to
concept of money itself
Money - III
$ Money as command



money gives command over commodities in stores
money gives command over the production of
commodities
money gives command over labor, people's time
$ Money as social power

Money commands labor only when people cannot
produce for themselves, money could not command
American pioneers, independent farmers
Money - IV
$ Money as embodiment of social command
in capitalist societies




money gives business the power to dispossess people,
to force them into the labor market
money gives capitalists power to command in labor
market
money gives everyone else the power to resist that
command, thus:
centrality of wage struggle between business and labor
Money - V
$ Money & Value viewed socially



money can be seen as embodiment of value, where
"social" substance of value = labor
form of value = exchange
 exchange between business & labor
 money/value as contradiction
 money/value as reflexive mediation
 money/value as syllogistic mediation
 money/value as infinitude
$ Money as social power
Monies
$ Commodity money


gold, silver --has value in use, takes labor to produce
useful qualities: divisible, portable
$ Fiat Money


paper or credit money mandated by government
"legal tender"
 from gold backed money
 to "Silver certificates"
 to "Federal Reserve Notes"
Money Supply in US
$ There are multiple definitions
$ Differences based on differences in "liquidity" of
various means of exchange
$ Degree of "liquidity" = facility of use in exchange
$ M1 = coin, currency, demand deposits, travelers
checks, other checkable deposits
$ M2 = M1 + savings accounts, money market
accounts, etc.
$ Most money = credit money
Banks
$ Banks are "financial intermediaries"
$ financial intermediaries


take in large number of small deposits
make smaller number of larger loans
Deposits
BANKS
Loans
Bank Accounting
Assets
Liabilities
Reserves
Deposits
Loans
Net worth or Capital
Total
Total
Net worth = Assets - liabilities
Totals must always balance
Bank Creation of Money
$ Money = coin, currency, demand deposits,
etc., etc.
$ Bank receives deposits
$ Bank can loan out most of deposits
(except for reserves)
$ Bank loans are deposited,
$ increasing total deposits and total amount
of money
Money Multiplier
$ Question: Repeated loaning of deposited
money and depositing of loaned money
will result in what increase in the money
supply?
$ Answer: initial deposit multiplied by
"money multiplier"
1
$ Money multiplier =
Required Reserve Ratio
Federal Reserve System
$
$
$
$
$
US "Central Bank"= Fed
System = 12 regional banks
Board of governors
Chairman of the Federal Reserve System
Functions





tries to control money supply
clears interbank payments
regulates banking system
bails out banks
tries to manage exchange rates
Tools for Controlling $ Supply
$ Fix, change reserve requirements


increasing  reduction in money supply
decreasing  increase in money supply
$ Fix, change discount rate


increasing it  reduces money supply
decreasing it  increases money supply
$ Open Market Operations


buying govt securities  increases money supply
selling govt securities  decreases money supply
Supply of Money
(graphically)
$ Within Keynesian theory question of supply and
demand for money always with respect to "price"
of money, i.e., interest rate
i
Ms = supply of money
Quantity of money
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