Understand economics from scratch

Chapter 22 How Much Do You Know about the Economic Situation and Government Behavior——Macroeconomics You Must Know (2)
For world currencies such as the U.S. dollar, the euro, and the Japanese yen, a small amount of additional banknotes can also be used to gather wealth on a global scale through currency depreciation, and slowly gather the wealth of countries around the world into their countries.Of course, if this approach is not restricted, it will lead to the reduction of government credit and the collapse of the monetary system. There are many precedents in the history of countries in the world.

Inflation rate: A measure of how much a currency has depreciated
Inflation is a monetary phenomenon, which refers to the depreciation of currency caused by the amount of currency issued exceeding the actual amount of currency in circulation.Inflation and price rise are different economic categories, but there is a certain relationship between the two. The most direct result of inflation is price rise.

Inflation rate is the ratio of excess money issued to the actual amount of money needed to reflect the degree of inflation and currency depreciation.In economics, inflation rate = (current price level - base price level) ÷ base price level.Among them, the base period is to select the price level of a certain year as a reference, so that the price level of other periods can be compared with the base period level to measure the current inflation level.

After the 20s, as floating exchange rates replaced fixed exchange rates, the impact of inflation on exchange rate movements became more important.Inflation means a rise in the domestic price level, and an economy is said to be experiencing inflation when the prices of most goods and services in an economy generally rise over a period of time.Since prices are the monetary expression of the value of a country's goods, inflation means that the value represented by the country's currency has declined.Under the circumstances that domestic and foreign commodity markets are closely connected with each other, generally speaking, inflation and domestic price rises will cause a decrease in export commodities and an increase in import commodities, which will affect the supply and demand relationship in the foreign exchange market and lead to the exchange rate of the country. fluctuation.At the same time, the decline in the internal value of a country's currency will definitely affect its external value and weaken the credit status of the country's currency in the international market. People will expect the exchange rate of the country's currency to weaken due to inflation, and hold the currency in their hands domestic currency into other currencies, resulting in a fall in the exchange rate.According to the law of one price and the theory of purchasing power parity, when the inflation rate of one country is higher than that of another country, the value actually represented by the currency of this country will decrease relative to the currency of another country, and the exchange rate of the currency of this country will decrease. fall; otherwise, it rises.For example, before the 70s, an important reason for the strong exchange rate between the yen and the former Bundesmark was that the inflation rates in these two countries had been very low.The inflation rates of the UK and Italy are often higher than the average level of other western countries, so the exchange rates of the currencies of the two countries are in a downward trend.

Three important indicators that affect changes in the inflation rate are as follows.

1. Producer Price Index

The Producer Price Index (PPI) is a measure of the price of goods sold by manufacturers and farmers to stores.It mainly reflects the price changes of the means of production and is used to measure the cost price changes of various commodities in different production stages.

2. Consumer Price Index

The Consumer Price Index (CPI) is a price index that measures the prices of a fixed basket of consumer goods.It mainly reflects the price changes of goods and services paid by consumers, and is also a tool to measure the level of inflation, expressed in the form of percentage changes.

3. Retail Price Index
The Retail Price Index (RPI) is the price index for retail goods paid for in cash or by credit card.The U.S. Department of Commerce surveys a sample of retail goods across the country every month, including furniture, electrical appliances, supermarket sales, medicine, etc., but various service consumption is not included.

Many foreign exchange market analysts pay great attention to the changes in the retail price index.The rapid development of the social economy and the increase in personal consumption will lead to an increase in retail prices. The continuous rise of this indicator may bring about upward pressure on inflation, causing the government to tighten the money supply, and the rising interest rate will bring benefits to the country's currency. support.Therefore, the index is positive and theoretically also good for the country's currency.

Monetary Policy: The Leverage to Control the Economy
According to preliminary statistics, in the first half of 2008, 6.7 small and medium-sized enterprises above designated size closed down.As a representative of labor-intensive industries, more than 1 small and medium-sized enterprises in the textile industry have closed down, and two-thirds of textile enterprises are facing restructuring.Now that our country's economy is developing rapidly, why do so many companies suddenly go bankrupt?The reasons for the collapse of so many small and medium-sized enterprises are very complicated, including factors such as the overall economic environment, the structure of the enterprises themselves, and the survival of the fittest in the market.But there is one reason that cannot be denied, and that is my country's monetary policy.

A country with a complete financial system has a central bank. In a broad sense, the central bank is the government's bank, which takes necessary measures in special times to ensure the implementation of monetary policy.The central bank of the United Kingdom is the Bank of England, the central bank of the United States is the Federal Reserve System, the central bank of Japan is the Bank of Japan, and the central bank of my country is the People's Bank of China.

Central banks are very different from general commercial banks in terms of purpose, functions, and business.It can be said that the central bank is the bank of the bank, and the special relationship between the central bank and commercial banks has the nature of management and management.As the government's bank, the central bank occupies a pivotal position in the national economy and plays a vital role in promoting economic development.There are three "magic weapons" for the central bank to implement monetary policy: deposit reserve ratio, rediscount rate and open market operations.

1. Deposit reserve ratio
As a banker who pursues the best interests, he understands that deposits are paid on demand. As long as customers withdraw their deposits, the bank must pay them immediately. This requires the bank to have sufficient reserves to meet this demand.These reserves that banks need to have are called deposit reserves.So what is the amount of the deposit reserve?
If all deposits had to be paid in full at the same time, the amount of reserves would be equal to the total amount of deposits; but in reality this almost never happens, and, on the same day, there are always some Deposits are made while others withdraw, and the amounts of these two types of transactions often cancel each other out.For bankers, funds held in the form of reserves are unprofitable. They lie in the bank's safe and can't even earn interest. So early bankers thought of lending customers' deposits go out.Most of the currency deposits are lent out to earn interest, and a small part of the currency deposits is left as cash reserves to meet customers' withdrawals.In this way, the banker's profit is increased on the basis of simply charging the handling fee, and the interest on the loan is increased to maximize the profit.

Then, how much should the amount of reserves reserved by commercial banks account for in total deposits?This requires the central bank to formulate.

The financial laws and regulations of various countries clearly stipulate that commercial banks must deposit part of the deposits they absorb in the central bank, and the ratio of this part of funds to the total deposits is the deposit reserve ratio.If the central bank raises the deposit reserve ratio, the currency in circulation will shrink exponentially, because commercial banks have more reserves handed over to the central bank, and the funds at their disposal will be less, so the bank's loans to enterprises will be reduced. Correspondingly, the deposits of enterprises in the bank will be less, so there will be a gradual decline in the "deposit-loan" in the whole society, resulting in a significant reduction in the total amount of social currency.Just like we are in the process of debugging audio, if we reduce the power of the power amplifier, the output volume will decrease. This is the reason why the central bank raises the deposit reserve ratio; The amount of money in will multiply.

2. Rediscount rate
When an enterprise borrows currency from a commercial bank, it often transfers undue commercial bills to the bank to obtain a loan. This behavior is called discounting in economics.

The central bank, as the "bank of banks", plays the role of lender of last resort.When commercial banks are short of cash and have difficulty in capital turnover, they need to ask the central bank for loans.The nature of this kind of borrowing is the same as that of enterprises borrowing from commercial banks, and they also need to pay.So commercial banks followed the same pattern and transferred the unexpired commercial bills obtained from enterprises to the central bank. This behavior is called rediscounting in economics.The central bank's acceptance of commercial bank bills is also conditional, and it must be discounted on the basis of the original price of the bills. This discount rate is the rediscount rate.Obviously, if the central bank changes the rediscount rate, it is equivalent to increasing or reducing the loan cost of commercial banks, inhibiting or encouraging commercial banks' credit expansion, and at the same time, the money supply will shrink or expand accordingly.

The discount rate is a basic concept that occupies an important position in modern economics. It solves the problem of how to evaluate future economic activities today.The so-called discount rate refers to the interest rate at which future payments are converted into the present value.

As we said earlier, when commercial banks need more loans or are short of cash, they need part of the currency. At this time, they hand over part of the commercial paper they own to the central bank, and the central bank deducts part of the money according to a certain ratio and converts it into cash.In this way, commercial banks can exchange bills for cash or serve as deposit reserves to expand their own loan volume.And this discount rate is called the rediscount rate.

The rediscount rate is the withholding rate when commercial banks apply to the central bank for rediscounting their undue bills.Rediscounting means that commercial banks borrow money from the central bank, which increases money supply and directly increases money supply.The level of the rediscount rate directly determines the level of the rediscount amount, and indirectly affects the rediscount demand of commercial banks, which in turn affects the overall scale of the rediscount.On the one hand, the level of the rediscount rate directly determines the level of the rediscount cost. If the rediscount rate increases, the rediscount cost will increase accordingly, and vice versa, thus affecting the demand for rediscount; Changes in the discount rate reflect the policy intentions of the central bank.The central bank implements a certain monetary policy by adjusting the discount rate. When the economy is overheated, the central bank will increase the rediscount rate in order to control the amount of money and the loan amount of commercial banks, so as to reduce the amount of commercial bank loans; In times of depression, the central bank will lower the rediscount rate, absorb the bonds held by commercial banks and carry out discounting to increase the reserves of commercial banks, encourage commercial banks to issue loans, stimulate social consumption and investment, and realize the normal operation of the social economy.

3. Open market business
When conducting macro-control on monetary policy, the central bank uses open market operations the most.

Open market operations refer to the activities in which the central bank purchases or sells government securities in the open financial market, increases or decreases the reserves of commercial banks, thereby affecting the entire economic activity and achieving the established goals.When the central bank buys securities, it pays the sellers in currency, thereby increasing the amount of money in circulation.When the central bank sells securities, it reduces the amount of money in circulation.

The biggest advantage of the open market business is that it has little shock to the economy, so the central bank can often use it to fine-tune the economy, and the operation process is flexible and convenient.Since the 20s, 50% of the Federal Reserve's money throughput has been realized through open market operations, and many other countries have also adopted open market operations to regulate money supply.

Open market operations can be divided into two categories: active open market operations and defensive open market operations.Active open market operations are aimed at changing the level of reserves and the monetary base; defensive open market operations are aimed at offsetting changes in other factors affecting the monetary base.For example, the Federal Reserve’s open market operations target U.S. Treasury and government agency securities, especially U.S. Treasury bills.

Compared with other monetary policy tools, open market operations have obvious advantages such as strong initiative and flexibility.As a result, the monetary operation methods of governments of various countries gradually converge, and they are gradually approaching the open market business that relies on the central bank.However, if the open market business wants to play an effective role, it is still subject to some conditions. Only when these important prerequisites are met, the open market business can play its role to the maximum.

From the above, we can see that the country's monetary policy is like a "big hand", constantly correcting the direction of the country's economy, which will have a major impact on the economy.Then, it is very necessary for us to have an in-depth understanding of monetary policy.

Generally speaking, monetary policy refers to the central bank’s use of various tools to adjust the money supply and interest rates in order to achieve the established economic goals (stabilize prices, promote economic growth, achieve full employment and balance the balance of payments), and then affect the macroeconomic policies and policies. sum of measures.

There are two types of monetary policy: contractionary and expansionary.

Contractionary monetary policy reduces the level of aggregate demand by reducing the growth rate of the money supply. Under this policy, it is more difficult to obtain credit and interest rates increase accordingly.Therefore, when inflation is serious, it is more appropriate to adopt a contractionary monetary policy.

Expansionary monetary policy stimulates aggregate demand by increasing the growth rate of the money supply. Under this policy, it is easier to obtain credit and interest rates are lowered.Therefore, an expansionary monetary policy is most appropriate when aggregate demand is low relative to the economy's productive capacity.

Cairns multiplier: One company's glass breaks

After a storm, the glass of a department store was scratched.

The department store took out 5000 yuan to repair the glass.After the decoration company reinstalled the glass, it got 5000 yuan, took out 4000 yuan to buy a computer for the company, and deposited the remaining 1000 yuan in the bank as working capital.The computer company sold the computer and got 4000 yuan, bought a motorcycle with 3200 yuan, and deposited the remaining 800 yuan in the bank.After the owner of the motorcycle shop got 3200 yuan, he bought a set of fashion with 2650 yuan and deposited 640 yuan in the bank.In the end, the sum of the income received by each company far exceeds the figure of 5000 yuan.The series of investment increases triggered by the scratched glass of department stores is the multiplier effect.

In economics, the multiplier effect is more completely the expenditure/income multiplier effect, which means that a change in a variable causes an increase in the final amount in the form of a multiplier acceleration.In macroeconomics, the multiplier effect refers to the disproportionate change in the total demand of the economy caused by the change of expenditure, which means that the series of chain reactions caused by the increase in initial investment will bring about a multiple increase in national income.

The so-called multiplier refers to such a coefficient, which can be multiplied by the change in investment to obtain the change in national income caused by the change in investment.Assuming that investment increases by 100 billion yuan, if this increase leads to an increase of 300 billion yuan in national income, then the multiplier is 3, and if the resulting increase in national income is 400 billion yuan, then the multiplier is 4.

Why is the multiplier greater than 1?For example, if a government increases 100 billion yuan to purchase investment goods, then the 100 billion yuan will flow into the hands of the producers of the investment goods in the form of wages, profits, and interest, and the national income will increase by 100 billion yuan. It is the first round of increase in national income caused by the increase in investment.The 100 billion yuan is converted into wages, interest, profit, and rent, and flows into the pockets of the owners of all the factors of production that manufacture the investment product. Therefore, an increase in investment of 100 billion yuan will increase the national income by 100 yuan in the first round. billion.As those who get these capitals will start the second round of investment and the third round of investment, the economic growth will increase with a multiplier greater than 100.

The multiplier effect is also called the Keynesian multiplier. In fact, before Keynes, someone had proposed the idea and concept of the multiplier principle, but Keynes further improved the theory.Keynes's multiplier theory played a major role in helping Western countries get out of the "Great Depression". Some people even compared it with Einstein's theory of relativity, and believed that the two greatest formulas of the 20th century were the basics of Einstein's theory of relativity. Formula and basic formula of Keynesian multiplier theory.The important role of Keynesian multiplier theory in macroeconomics was paid attention to after the world economic crisis from 1929 to 1932, and once became the driving force behind the "economic pull" after the Great Depression in the United States.

The multiplier effect that was initially used in macroeconomic regulation was not limited to macroeconomic regulation in later development.In management, there is also a multiplier effect.Managers hope that management can achieve a multiplier effect.For example, for the implementation of a sales promotion plan, managers hope that the effect of this plan can be multiplied, but without the implementation of other strategies, the multiplier effect is difficult to achieve.Another example is the incentive policy. Managers have adopted results incentive methods or process incentive methods, but the best results may only have effects on certain specific behaviors, while continuous incentives or spontaneous incentive effects are impossible to achieve.

(End of this chapter)