PRINCIPAL OF ECONOMICS

Principal of Economics

Principal of Economics

Money

In the nineteenth century, “money” became the epitome of a conception of economy and society that assigned the leading role to the rapidly growing industrial production. We usually think of money as money that is kept in banks, invested in shares or stocks, or concretely represented by material goods such as a car, a house, or industrial infrastructures. However, investing in training courses, education, and healthcare can be equally productive forms of investment to relieve poverty.

Money is an asset, one that yields income and outputs over time. Money is the value of productive services. The value (or the money good) is the market price paid. Becker (1993) made an argument that human money is not really money at all. The term was coined so as to make a useful illustrative analogy between investing resources to increase the stock of ordinary physical money (tools, machines, buildings, etc.) in order to increase the productivity of labor and “investing” in the education or training of the labor force as an alternative means of accomplishing the same general objective of higher productivity.

Central Bank and Monetary System

Monetary policy provides an important tool for fighting poverty at the macroeconomic level. (Baumol and Blinder, 2003) Monetary policy is distinct from fiscal policy, or the taxing and spending decisions of governments. But governments can use both of these tools to influence inflation, economic output, and unemployment. Monetary policy is typically controlled by a country's central bank.

Monetary policies can either be expansionary or contractionary. By influencing interest rates and the size of the money supply, the central bank can boost the economy during a downturn, or slow down the economy during an overheating phase. Tools of monetary policy include open-market operations, setting reserve requirements, and providing loans to commercial banks (Mishkin, 2004). A large number of countries also use monetary policy to bring stability to their exchange rate. But countries with open capital markets are limited by their inability to simultaneously use monetary policy to influence the domestic economy and to control the exchange rate.

The most important tool of monetary policy is open-market operations. With this tool, the central bank buys and sells government bonds or other financial assets in secondary markets, in order to influence the money supply. When a central bank buys a government bond from a commercial bank or individual, the money supply increases, because the central bank provides a monetary credit to the seller.

On the other hand, when a central bank sells a government bond to a bank or individual, the money supply decreases because the purchaser pays the central bank with money. This money no longer circulates through the economy when it is in the central bank, and so it has been removed from the money supply. With open-market operations, the central bank can exert a strong influence over the size of the money supply in its country.

Open-market operations are the most important tool, but changing the reserve requirements and changing the discount rate are other possible tools (Mishkin, ...