Request an Inspection Copy. Oxford University Press is a department of the University of Oxford. It furthers the University's objective of excellence in research, scholarship, and education by publishing worldwide.
Search Start Search. Look Inside. Description About the Author s Table of Contents Reviews Description Combining rigour with clarity, Lipsey and Chrystal's comprehensive introduction to economics helps students to understand micro and macroeconomics by using a consistent, theoretical framework to examine the topics.
Related Titles. Davis Request an Inspection Copy. This section is designed to inoculate students against the many myths and monetary cranks to which they may be exposed in everyday life. Starting with barter, the text proceeds through the history and roles of money to the relative sophistication, in the third section, of modern money and definitions of the monetary aggregates in use in the UK in Box The final section of the chapter presents two models of how the supply of money is determined.
This model tends to make the role of the banks seem rather passive. The second model takes into account the highly competitive markets in which modern banks operate and presents the banks in a more active role.
In this model banks find profitable lending opportunities and then find the funds with which to make the loan, playing all the time in the market for loans with its supply curve of deposits and demand curve for loans.
This model is more relevant currently, in an era when central banks aim to control the money supply by altering short-term interest rates. The first case study is on the Northern Rock crisis and links with Box Both are new to this edition. Notes for users of the previous edition Box The whole final section on financial crises is new, as is Box Both case studies are new and clearly linked to the financial crisis.
See Box See Figure The monetary authorities then control the money supply the money stock via their influence over the total stock of deposits. Using their knowledge of the demand for loans the monetary authorities set an interest rate to generate a certain level of demand for loans and then supply the required high-powered money at whatever interest rate they have chosen. The supply of high-powered money is thus demand determined at a chosen interest rate.
Money is the most liquid of all assets. Money is a store of value for individuals and firms and it is also used as a unit of account. These three roles of money mean that in a market economy money contributes towards the transparency and efficiency of markets. The difficulties associated with such arrangements can then lead to a discussion of the significant transactions costs that would be incurred should an economy not have money.
The question also lends itself to a discussion on the uses of money and the attributes of useful forms of money—money needs to be durable, portable, divisible, in restricted supply, and so on. Many commodities have been used as money: pigs, cows, cigarettes, nylon stockings, seashells, and stone wheels, are but a few examples.
It is divided into five main sections. The first starts with an exploration of money values and relative values, in which the authors point out that the neutrality of money is a long-run equilibrium concept—in the short run a change in the price level will involve changes in relative prices so that inflation will have real effects.
This is followed by a couple of important pages offering a general discussion of financial assets and the links between their market price, present value, and the rate of interest. The following four sections continue the development of the macroeconomic model from Part Five. Section two focuses on the theory of money demand, explaining the relationship between money demand, nominal interest rates, wealth, real GDP, and the price level. The text is clear about this point. Once students understand the pricing of financial assets and the basics of money demand, they are ready to consider equilibrium in the money market and how this relates to the real side of the economy.
This is a critical section. Experience shows that it is accessible to any first-year student but care in exposition, practice with exercises, and some repetition by instructors may be needed before students master it. The fourth section of the chapter explores macroeconomic cycles and aggregate shocks, using the aggregate demand and aggregate supply framework developed in previous chapters.
The main part of this section discusses the processes of adjustment to both aggregate demand and aggregate supply shocks, and indicates possible fiscal and monetary policy responses to such shocks. The section finishes with a reminder that stabilization policy is an imperfect art and the source of much controversy. The implementation of monetary policy in the UK and in Europe is discussed in the fifth section of the chapter; the authors note that the arrangements described are relatively new and may well change.
In both the UK and the euro zone the main objective of the central bank is to maintain price stability and the means chosen is the setting of the short-term interest rate. How this works in normal times is first explained and is now followed by a new section on the interest-rate lower bound problem and a case study on quantitative easing.
While the Bank now has greater independence of the government, it also has to account more frequently and openly for its decisions. The policy goal is still set by the UK government but the Bank chooses the means to best achieve this goal.
Setting an interest rate to control inflation involves a number of uncertainties, not the least being due to the time lags in the transmission mechanism. The transmission mechanism is discussed further in Chapter Figure Unlike the Bank of England, the ECB has the power to both set its target for price stability and choose its instrument. A new sub-section on monetary policy in times of crisis follows. The first case study explains what quantitative easing is an how it may work to influence aggregate demand.
The second case study looks at problems in the Japanese economy in the past two decades or so. This is updated to use Japan as the country that first hit the interest-rate lower bound problem. The slowdown in the rate of growth, the increase in unemployment, the falling price level, and the financial crisis took many people by surprise and policy makers have been uncertain about their best course of action.
With the benefit of hindsight some of the reasons for these events are clearer and the text outlines several, before discussing why the usual monetary and fiscal policy responses have been less effective than was hoped. The explanation found here is thorough. It also makes reference at several points to the real world, in which the authorities set the interest rate and the money supply adjusts to equate money demand and money supply.
Traditional accounts had the interest rate determined by the demand for and supply of money, with the authorities controlling the supply of money. The text has been updated where necessary and in light of recent events.
The Japanese case study is not new but has been updated substantially. The transactions demand for money falls as GDP falls so that with a fixed money supply there is downward pressure on interest rates. If on the other hand the monetary authorities set interest rates, they will sell bonds to reduce the money supply in order to maintain the same interest rate. The transactions demand for money rises as GDP rises so that with a fixed money supply there is upward pressure on interest rates.
If the monetary authorities want to sustain the interest rate, they will buy bonds and thus increase the money supply. Again, see Figure A cut in the rate of interest will increase investment and consumption spending, and will increase net exports. As shown in Figure Monetary policy has a much shorter decision lag than fiscal policy. Fiscal policy tools to control inflation involve either the government spending less, or increasing tax rates, or both. Government spending is extremely difficult to reduce at short notice so is not particularly useful when a government wishes to control inflation.
Although it may require some time for tax rates to be changed this may nevertheless be a more effective way of reducing AD. Increases in the interest rate may be used to control inflation, again by causing a reduction in AD, principally by reducing investment spending. As people buy bonds money flows into the central bank and the money supply is reduced.
If this action is sufficient to control the money supply then it will help control inflation. Monetary policy is probably most effective as a way of controlling inflation when the intentions of the monetary authorities over the long run are clearly understood, and unwavering. When fiscal policy is used as a stimulus to the economy, i. However scope for increasing a budget deficit may be constrained.
A reduction in interest rates would also increase aggregate spending in normal circumstances, though not when there was a liquidity trap. As the rate of interest rises, the level of investment falls, AE is lower, and the equilibrium level of GDP falls. Thus there is a negative relationship between the price level and equilibrium GDP, giving the AD curve a negative slope.
In this case a rise in the price level leads to a reduction in the real money supply, which shifts the LM curve to the left, leading to a higher rate of interest and lower GDP.
Since the AD curve is determined by the intersection of the IS and LM curves, any factor which affects the slope of either of these will affect the slope of AD. The slope of the IS curve depends on the interest elasticity of investment and on the size of the multiplier. The slope of the LM curve depends on the elasticities of the demand for money with respect to the rate of interest and to GDP.
Any factor which changes any constituent part of AD will cause AD to shift. This would be a good question for a brainstorming session in a class, or perhaps for a competition in which the group with the most correct suggestions wins. This is a logical start in that it provides some basic facts and identifies key terms. The object is to familiarize students with the meaning and significance of the major categories which they are likely to encounter in everyday discussion.
The accounts are set out in the format introduced in the UK in , which conforms to the international standard format. Credits, debits, and balances are shown, giving a clearer overall picture, and some terminology changed.
The last part of the first section explores some common misconceptions about the balance of payments. These phrases usually refer to the balance of payments on current account and may betray an old-fashioned mercantilist view of trade. It deals with the new mercantilist idea that only the balance of trade matters and makes the key distinction between the volume and the balance of trade as sources of the gains from trade.
The second section focuses on the market for foreign exchange, first defining the exchange rate and explaining why foreign exchange transactions are necessary in a world with foreign trade and country-specific currencies.
The text then discusses the demand for foreign currency and the supply of foreign currency in the foreign exchange market. This material is consistently linked to the discussion of the balance of payments accounts found earlier in the chapter. The third section, on the determination of exchange rates, will be much easier for students who have studied demand and supply at some length, but it can be handled with only Chapter 3.
Although the theory is nothing but another application of the competitive theory of price, students tend to find it difficult, because of the necessary chains of reasoning, to link shifts in the demand for and supply of goods and services to shifts in the demand for and supply of foreign exchange and, thence, to changes in free-market exchange rates.
After the concept of equilibrium in the foreign exchange market is introduced, the distinction between fixed and flexible exchange rates is made in terms of whether or not the monetary authorities intervene in the foreign exchange market. Managed floats are also briefly discussed. The problems associated with fixed exchange rates may be seen as a further example of the difficulties of price intervention, first met in Chapter 3. The rest of the chapter focuses on flexible exchange rates, looking first at some of the more important causes of the shifts in demand and supply that lead to changes in exchange rates.
The major payoff for students is found in the review, at the end of the chapter, of the behaviour of exchange rates since the arrival of floating in the early s. There are two key topics. One is purchasing power parity PPP , which is discussed in detail in both the short term and the long term. Despite the logic of the law of one price, applying this logic to price indices can be dangerous, and as a result there are good reasons to expect PPP not to hold.
A discussion of the links between the interest rate and the exchange rate leads to an acknowledgement of the significance of the exchange rate as an element of the monetary transmission mechanism, and points the reader towards Chapter The first case study discusses the links between global imbalances and the financial crisis which is first raised in Box Both cases are new to this edition. The second case study on balance of payments adjustment is also new.
0コメント