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Learning objectives:
Consider the nature of money and its functions in the economy. Learn about the central bank system Examine how the banking system helps determine the supply of money. Examine the tools used by the central bank to alter the supply of money.
Out line:
1-The meaning of money: 2-The supply of money: 3-The demand of money: 4-The monetary policy:
Introduction:
The key aim of monetary policy for most central banks is to keep inflation low and steady. However in a market-oriented economy, central banks cannot control inflation directly. They have to use instruments. Some central banks use money growth or the exchange rate as intermediate targets to guide policy decisions. Others take a more eclectic approach and consider a range of factors. Monetary policy has occupied much time of the worlds most distinguished economists over the years.
Clarifying a misunderstanding:
In our everyday lives, we often refer to money as one of three things: coins and paper money (currency). a person's wealth. a person's income.
Measuring money M1
Narrowest definition and measure of money supply Assets used primarily for transactions
Currency (coins & paper money) Checkable accounts Travelers Checks M1 plus Savings deposits, including Money Market deposit accounts Small time deposits Money Market Mutual Funds
Measuring money M2
}
} M1
M2
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M3
Measuring money M3
Even Broader definition of money supply Includes items that serve as a unit of account M2 +
The largest element of money supply is bank deposits. Banks are able to create additional money by increasing the amount of bank deposits. They do this by lending to people: granting people overdrafts or loans. The process of the creation of credit . The effect of the bank multiplier.
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macroeconomic stability
Macroeconomic stability implies: 1. Economic growth 2. Low inflation 3. Exchange rate stability 4. Financial sector stability.
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Monetary Policy: AD
Price Level AD
P1 P2
New AD
Y1
Y2
New Y1
Y (GDP)
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Monetary Policy: AS
Price Level
AS New AS
Y1
Y2
Y (GDP)
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Price Level
P1
New AD AD
AS
P0
Y0
Y1
Y
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Discourages saving; Encourages speculation, dollarization, capital flight; Hurts the poor, and
Raises uncertainty.
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1. open-market operations.
The Process of buying and selling government bonds in the financial market is called Open market operations. This process can be divided into to cases: A. Open Market Purchase. B. Open Market Sale.
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The central bank buys government bonds from firms or households. The central bank pays for these bonds with check drawn on itself and payable to the seller. The seller deposits the check in a commercial bank. The commercial bank present the check to the central bank for payment. The central bank make a book entry increasing the deposit of the commercial bank at the central bank and adds to the commercial banks reserves.
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The central bank sells government bonds and receive a check drawn on commercial banks. The value of the check will be deducted from the deposit of the commercial bank. This decreases the reserves available to commercial banks which will decrease the loans made by commercial banks.
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2. reserve requirement.
An increase in the required reserve ratio forces the banks with no excess reserves to decrease its loans, which in turn, decreases the deposits and that will decrease the money supply.
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3. discount rate.
It is the interest rate at which the central bank will lend funds to commercial banks whose reserves are temporarily below the required level.
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The 1st problem is in controling the amount of money that households choose to hold as deposits in banks. The 2nd problem with monetary control is that the central bank does not control the amount that bankers choose to lend.
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Morocco:
Population: 34,343,220 (July 2008 est.) GDP: 137.4 billion (2008 est.) Macroeconomic Data Inflation rate (consumer prices): 4.6% (2008 est.) Labor force: 11.5 million (2008 est.) Unemployment rate: 9.1% Budget: Revenues: $26.09 billion; Expenditures: $28.41 billion (2008 est.) Public debt: 60.2% of GDP (2008 est.) Banking System 16 commercial banks with $60.2 billion in Assets.
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Moroccos economy
The Moroccan economy has been characterized by macroeconomic stability, with generally low inflation and sustained, moderately high growth rates over the past several years. Morocco's primary economic challenge is to accelerate growth and sustain that improved performance in order to reduce high levels of unemployment and underemployment. While overall unemployment stands at 8.6% (2010 est.), this figure masks significantly higher urban unemployment, as high as 31% among young urban males.
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Capital account restrictions apply to residents, but transactions for nonresidents are mostly free
There is an absence of benchmarks International agreements are transforming the formerly closed nature of the economy Macroeconomic conditions were strong in 2001-2002
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Weeknesses:
Precarious solvency and liquidity situation of two large state-owned specialized banks. The level of nonbank financial institutions and sectors.
Opportunities:
Threats:
The financial system could contribute to economic growth. Increased openess would bring benefits and opportunities to Moroccos financial institutions and other economic agents.
Fiscal problems. The inefficiency of the legal and judicial systems remains an impediment to the development of the financial sector.
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Morocco's banking sector is fairly well developed and modern. The banking system is made up of the Central Bank, Bank al-Maghreb, 16 commercial banks (partially owned by or working in partnership with European banks such as BNP Paribas), several development banks, and 36 financing companies. Seven banks control the market and the principal actor is the Banque Populaires network, followed by Attijariwafa, the BNPE and banks controlled mainly by foreign shareholders, including the BMCI (a subsidiary of BNP-Paribas) and the Credit du Maroc (a subsidiary of the Crdit Lyonnais-Crdit Agricole Group). The Caisse des Dpts is extremely active in real estate and tourism, funding public interest projects as well as more modest initiatives.
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Conclusion:
Monetary policies are demand macro economic policies. They work by stimulating or discouraging spending on goods/ services . Monetary policies tries to eliminate those fluctuations. Central bank have no handle on productivity and real economic growth.
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References
Mishkin, F. The Economics of Money, Banking and Financial Markets, p. 44 Economic - Principles of Macroeconomics Slomar,J. The economic envoronment of business ,p.227-258 Morocco: finacial system stability assessment. 2003 Morocco Final: M,El Hajoui-A,Marrache-R,Rosenberg-K,Spriggs R,Christiansen, IMF Resident Representative in Georgia.ppt, July 2005 IB Economics, 3.4 Addison,wesley losman, chapter 29 IMF,Morocco Financial Stability Assessment (2008).pdf, and The Report: Emerging Morocco 2007 Borrowing Rates,1983-2009.pdf http://web.worldbank.org/WBSITE/EXTERNAL/ACCUEILEXTN/PAYSEXTN/ MENAINFRENC HEXT/MOROCCOINFRENCHEXTN/0,,contentMDK:20149674~pagePK:14113 7~piPK:1411 27~theSitePK:468145,00.html http://ocw.mit.edu www.investopedia.com www.BKAM.ma
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