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"The Wealth of Nations" (English: The Wealth of Nations), fully titled "An Inquiry into the Nature and Causes of the Wealth of Nations," is an economic treatise by Scottish economist and philosopher Adam Smith. Its first Chinese translation was "Original Wealth" by translator Yan Fu.

Adam Smith (English: Adam Smith, June 5, 1723 (baptized) (Gregorian calendar June 16) – July 17, 1790) was an 18th-century Scottish philosopher and economist, regarded as one of the founders of modern economics. His work "The Wealth of Nations" is the first attempt to elucidate the history of industrial and commercial development in Europe and is considered a milestone in economics. This work proposed many classic theories, including the concepts of free market economy, division of labor, and market self-regulation, which have had a profound impact on the development of economics, political science, and moral philosophy.

These three sciences can be classified from two perspectives:

• One is whether they are abstract or tangible;
• The other is whether the research object of the entire science acts on the world.

Formal science is essentially our abstract study of the world. Its advantage is that when you abstract a very simple law from things, by exploring this law, it can serve as a framework to help you understand the world and even predict things we have not yet observed.

However, the disadvantage of this abstraction is that we can never fully model the world; it loses some information, and our abstraction of the world is always incomplete.
Moreover, the higher the complexity of things, the harder they are to abstract well.

Now, I am preparing a series of videos on economics, starting with "The Wealth of Nations."

My plan is to discuss part of the book's content, trying to help everyone understand "The Wealth of Nations," avoiding misinterpretations and not reading with preconceived notions; part of it will involve some extended thoughts based on the book's content, essentially sharing my own reflections after reading.

I hope the content will be lively and interesting, presented in a casual talk format. Additionally, I will incorporate knowledge from other fields during the teaching process. After all, Adam Smith's entire "The Wealth of Nations" also mixes economic philosophy, historical political theory, and practical plans; personally, I also like to draw on various references to enhance understanding during my learning.

Then, I will tidy up the visual effects, and I won't wear my cotton coat. I hope this will increase your interest in learning.
After all, this book is not difficult; if you can listen, you will definitely understand.

The first video of the first episode will be a simple introduction.

First, I want to emphasize an important point regarding the choice of translations. I have seen three versions of "The Wealth of Nations" offline, and I have checked the information of over a dozen translators on WeChat Reading online. If you can buy a physical book, I recommend choosing the one translated by Yang Jingnian; if you are reading an e-book, then Tang Risong's translation is better than the others.

Tang Risong is an economics professor at Peking University. Other translators are either professors at ordinary universities or well-known translators, but not specialists in economics. The main criticism of Tang Risong's version is that it is too textbook-like, with a very rigid translation that feels too much like a professor, but it has relatively little missing information.

Another version is a free translation, which has been rated as the easiest to understand, but that version is a bit too free; how should I put it? It doesn't even include the "invisible hand," which is a classic content in "The Wealth of Nations," and that translation is missing.

Personally, I think when reading such books, it doesn't matter whether the translation has literary quality; it's not poetry, and it doesn't matter how rigid it is. After all, the threshold for understanding this book is not in the words, and even if it is rigid, I can explain it clearly to you.

So, I won't recommend a version I saw offline that had illustrations but was edited down. All illustrated versions have been edited; they deleted parts that were hard to understand to help readers better grasp the content of the book, and then added many illustrations, successfully turning it into a children's recommended picture book. We adults don't need to look at pictures, okay? That's all for kids.

There is also a version published by the Commercial Press that is really a pile of garbage. I won't even mention the content being garbage; the layout is like treating me like a fool. I was really angry when I bought it. That book has more than half of its pages left blank, the text is all cramped together, and the pages look even more bald than mine, with particularly small text. Whoever likes it can read it.

I compared Yang Jingnian's and Tang Risong's translations, and I personally think Yang Jingnian's translation is better and more refined. First of all, he is Chinese, so there are no issues with his native language. Secondly, he studied in the UK, specifically studying political science, philosophy, and economics at Oxford University, and then returned to become an economics professor at Nankai University. I think his English and economics level are also fine. He was 90 years old when translating this book, so he doesn't have the situation of young guys being restless and seeking fame. However, I couldn't find an electronic version of his; I can only present Tang Risong's version, but it should be quite similar. If conditions allow, I still recommend buying a physical book. Having a physical book at home is like an anchor point; it can always inspire you to feel the urge to finish reading it when you see it, and it might remind you of me, but that's not important.

Adam Smith is the father of economics and holds an almost divine status in the field of economics. However, the world only knows half of Adam Smith. Regarding this issue, we cannot avoid mentioning the "Smith Mystery," nor can we overlook another book by Adam Smith, a monumental work that consumed as much of his time and energy as "The Wealth of Nations," titled "The Theory of Moral Sentiments."
In "The Theory of Moral Sentiments," he discusses the ethical view of altruism based on the sympathy inherent in human nature; in "The Wealth of Nations," he discusses the self-interest perspective of egoism. This contradiction in the history of economics is known as the "Smith Mystery." Without understanding "The Theory of Moral Sentiments," one cannot truly grasp a complete Adam Smith. Adam Smith was deeply influenced by his best friend David Hume's theory of human nature, making human nature the starting point of all his theories. Adam Smith's research is essentially about constructing a social order that aligns with human nature. His philosophical views stem from the natural philosophy of his contemporary Newton, as well as the order of nature. Newton discovered the law of universal gravitation that unified the physical world, and Adam Smith similarly proposed several theorems, attempting to unify moral and social interaction norms in the same way, which can help people distinguish right from wrong and choose the correct actions. Such actions will choose between self-interest and altruism, establishing a perfect balance that contributes to social welfare.
This is quite interesting; in any era, if there is a great philosophical idea, as an advanced intellectual of that era, you will inevitably be influenced by it. For example, since Einstein published the theory of relativity, many educated people have changed their perspectives on the world. When you know that time and space are relative rather than absolute, our past ideas about absolute things or measurable things will shift. Unfortunately, Adam Smith's "The Wealth of Nations" has received great attention from the world; people even regard "The Wealth of Nations" as the Bible of economics, treating the "invisible hand" as the eternal fundamental principle of market economy, the "crown jewel" of economics.
Foreigners love to use this metaphor, "crown," "queen," "pearl." Every preface of a number theory book will mention that Gauss said, "Mathematics is the queen of sciences, and number theory is the crown of mathematics," and many unresolved conjectures in number theory are the pearls on the crown. I have bought several number theory books, preparing to make a video course on number theory, and I can see this sentence in each book.
Oh, and India is the "pearl in the crown" of the British queen because the largest jewel on the queen's crown was excavated from India. Yet, people completely forget about Adam Smith's other book, "The Theory of Moral Sentiments," which he valued even more. Smith certainly favored the free market system, but people overlook the essence of the market in society. "Sympathy" is the foundation of moral behavior; if a society lacks this foundation, it will lose its direction. When understanding Adam Smith, if one only knows "The Wealth of Nations" but not "The Theory of Moral Sentiments," they at most know half of Adam Smith. If this leads to a distorted interpretation of "The Wealth of Nations," then the understanding of Adam Smith is less than half; similarly, if one only knows "The Theory of Moral Sentiments" but not "The Wealth of Nations," they also only know half of Adam Smith. Unfortunately, due to the limitations of economic development levels, humanity places more emphasis on economic interests rather than moral sentiments. Therefore, people only care about Adam Smith's "The Wealth of Nations" while neglecting "The Theory of Moral Sentiments." They mistakenly believe that Adam Smith only advocates for human selfishness, even thinking that Adam Smith himself is an extremely selfish person. In fact, this is completely wrong. Adam Smith is primarily a compassionate moral philosopher and only secondarily an insightful and analytical economist.
Many naive individuals say that after reading "The Wealth of Nations," they understand Adam Smith to be a very selfish person, but I think those who say this generally haven't read it. Very few people can persist in reading a book of several hundred thousand words while disliking the author. Right? They say Smith is advocating for the bourgeoisie, justifying the bourgeoisie's oppression of the people. There is a saying that when we are born, we are just ignorant, but as we grow, we become foolish.

If people are very young and come into contact with these doctrines, we can probably view them from a more neutral perspective and appreciate how the author conceived this viewpoint. However, as we grow, we become foolish; we develop many preconceived notions, and our context and materials are colored. When we talk about words like "self-interest," it gives you a very uncomfortable feeling, and you cannot discuss this topic normally.

What you see is merely what you have fished out from your thinking's dye vat, and you cannot get closer to the truth.
In China, we often exaggerate the negatives of ignorance. When I was young, I read Sherlock Holmes; he was unaware of many common knowledge in life, yet he could recite cases from a hundred years ago. Sometimes we may overstate the negative effects of ignorance. Ignorance is too negative in our eyes; ignorance is not that negative because there is too much knowledge in this world. Each of us lives and works in our respective fields of expertise. Ignorance is absolute; knowledge is only relative, and ignorance is inevitable. I remember once wanting to play a soccer game, and a friend laughed at me, asking if I knew how many people played soccer. What kind of person is my friend? He loves soccer, can name any star, enjoys movies, likes Hong Kong stars, and knows a lot about the Three Kingdoms. From his perspective, I look very ignorant. At that time, I indeed didn't know how many people played.

However, a basic fact is overlooked: in almost any field in this world, if you spend two years, you can learn to a level far beyond the average person, even if you have never encountered something like the subway or used electronic products. If you go to Wuhan to attend university for two years, you will also learn to take the subway and use a computer. We overestimate the horror of ignorance; no matter how ignorant you are, if you spend two years on anything, you can do better than the average person. Even if you are a bumpkin, if you study piano for two years, you can play decently.

When you talk about not knowing certain things, you don't need to be too shy. Not knowing is just not knowing; there is no information with too high a learning threshold. When your friend talks to you about some insider information in a field you don't know, you don't need to feel anxious. For example, when a friend from an insurance company shares some industry insider information, thinking he understands the truth of the world, in fact, no information is very difficult to obtain. In this age of information overload, any knowledge a normal person wants to acquire is easily accessible. In the past, the threshold for information was relatively high; for instance, in the era when we could only obtain information through television, if you wanted to watch Yi Zhongtian's commentary on the Three Kingdoms, you had to sit down every week. If you were a little late, you wouldn't see similar programs, and if you missed that program, you couldn't find a replacement.

However, in this age of information overload, ignorance is the least scary thing. You can always find and learn anything you want. So what truly stops us is ignorance; ignorance makes us blind to the truth. Even if we invest multiple times the effort, we may only achieve the opposite result.

I hope everyone can maintain a state of ignorance while watching my lessons.

Just like I find that many people who are not good at physics are not necessarily stupid; they just approach problems with prejudice. Our observations often deceive us; we feel the earth is not rotating, and we feel that an object not subjected to force does not move.

Adam Smith's understanding of human nature is comprehensive and profound.
I do not quite agree with this view; it is like the theory of unification. Einstein wanted to unify quantum mechanics and relativity. Everyone knows that quantum mechanics and relativity are incompatible, but both are correct. It is difficult to find something that unifies them.
Human experience tells us that truth is never at the two extreme endpoints.

My thought is that "The Theory of Moral Sentiments" is not valued as much as "The Wealth of Nations." One reason is that "The Wealth of Nations" is an economic work, and people are more interested in economics. Another reason, which I think may be more important, is that Smith successfully abstracted an economic framework in "The Wealth of Nations." This framework can be verified, and on this framework, other things can be constructed. However, "The Theory of Moral Sentiments" has not formed a stable framework; it only explains part of the phenomena but does not provide a systematic explanation. It is very much like indigenous religions in China, which provide explanations for supernatural phenomena that were not understood at the time, but they do not form a system. Therefore, at most, it presents itself as a form of decentralized religion rather than an institutional religion. If "The Theory of Moral Sentiments" could also find a universal framework for moral sentiments like "The Wealth of Nations," and serve as a foundation for the category of moral sentiments, allowing others to continue developing on it, I believe it would also gain high recognition. In reality, we do not have a very persuasive framework in ethics and morality; at least I do not know of one, or there may be one, but it is definitely not "The Theory of Moral Sentiments." It is still said that "The Theory of Moral Sentiments" does not have this foundational role and has not become a pillar of a discipline. However, "The Wealth of Nations" has become a pillar of economics, so it cannot be said that people do not value moral sentiments.

Adam Smith's influence in the field of economics is the greatest. Adam Smith's surname "Smith," according to current translation norms, should be translated as "史密斯."

There is no interesting story here.

This is followed by an introduction to the book.

Today's China has returned to a market economy, which requires economic theories that are compatible with the market economy, and the theoretical foundation of the market economy is Adam Smith's "The Wealth of Nations." As mentioned earlier, Adam Smith's economics is as important as Newton's theories in physics. His "invisible hand" is like Newton's law of universal gravitation, a great concept that Adam Smith has contributed to humanity. The market economy system cultivated by this concept, despite various shortcomings, is so far the only economic system that has been proven successful in organizing economic activities with all of humanity's wisdom. We have long denied Adam Smith's wisdom, even calling the "economic man" and the "invisible hand" a blatant defense of "private ownership." Fortunately, we have now accepted Adam Smith's main viewpoints. Specifically, the significance of Adam Smith's "The Wealth of Nations" in today's China is mainly reflected in the following two points:

The most authentic portrayal of ignorance. You can deceive one person for a long time, and you can deceive many people for a short time, but you cannot deceive many people for a long time. Lies cannot do this, but ignorance can.

This means that the self-interest mentality of people in economic activities is self-evident, just like we all hope to buy things cheaply and sell things at a higher price; it is such a natural mentality that China has been unwilling to admit in the past few decades, or rather, unwilling to accept human self-interest, calling it immoral.

But in fact, this is a very moral act, and I will discuss it later. However, it does not specify which decades.

So there is a viewpoint here that we believe the assumption of self-interest should become the cornerstone of economic analysis. If you exclude self-interest, how can you conduct economic research? This viewpoint is very similar to Hayek; the market economy requires a small government. Our ancestors also mentioned the idea of a small country with few people, but it is somewhat different, so I won't elaborate on it.
To be fair, planned economy is not bad; rather, it is too good to be implemented immediately. We believe that humanity will eventually embark on a path dominated by planned economy. We hope that the conditions for humanity to adopt a planned economy will mature soon, and by then, Adam Smith's "The Wealth of Nations" may indeed become outdated and be sent to the museum of economic theory. However, we believe that even in the museum, Adam Smith's "The Wealth of Nations" will still be the most valuable theoretical exhibit.

Here you can see the translator's philosophical view; first, he is a dualist, so he is looking for a third book, seeking a golden balance point. Secondly, his philosophical framework does not consider the issue of limits; his philosophical view is heavily dualistic. He believes that planning can govern everything, but from my perspective, planning has extremes.

I believe that planning is a process of using formal science to guide our daily lives because planning itself is a form of logic, or something close to logic and mathematics. We use this formal science to guide our daily lives. This is where planning and the market differ significantly. One emerges from social sciences, while the other is a form of formal science used to plan society.

When we talk about the market economy, we hope it is governed by a small government that sets a general framework for the market to grow within this framework.

The logic of planned economy is that we hope to find a particularly perfect formal scientific law and use it to guide us once and for all.

In summary, I believe that planning belongs to formal science, and formal science guiding the world will have flaws.

Why will there be flaws? It is like we cannot find a perfect circle in the world. You see something that looks good; it is impeccable in the abstract world, but it cannot perfectly project into the real world unless you ignore its precision. If you ignore enough precision, there are indeed circles in the world.

Our physical world is governed by entropy; a perfect circle is perfect, which means it has infinitely low entropy, so such a perfect thing cannot be found. Therefore, everything in the world has errors; it is just a matter of how much error there is.

If you do not consider the real physical world, in mathematics, the speed of something can be infinitely large, but in the real world, it cannot exceed the speed of light.

Everyone knows about Heisenberg's uncertainty principle, which is the principle of indeterminacy. You think that as long as you can observe all the values, you can calculate them using mathematics, but you can never observe all the values. Moreover, you cannot create a perfect machine; you know that some energy is lost, but you cannot prevent it from being lost. The perpetual motion machine that amateur scientists often talk about is feasible in a perfectly abstract world, in the mathematical world. However, in reality, it is not feasible; it has nothing to do with technology. No matter how advanced your technology is, this matter cannot be realized in the philosophy of physics.

I believe that a complete plan is the same as a perpetual motion machine; it does not mean that technology reaching a certain peak can realize it. Just like Marx said, in a communist society, all members of society possess a high degree of communist consciousness and moral quality. I think this is a moral version of a perpetual motion machine. I do not believe in perfect human nature. I do not believe that moral development can evolve into perfection. The final society is one where everyone is selfless; he must not have studied physics. He does not know how low the entropy of universal selflessness is. This assumption is a terrifying assumption, and it is no different from suddenly having a perfect circle in the world or a perpetual motion machine. If my theory allows for a perpetual motion machine, my theory is also invincible.
To add a concept, entropy is a measure of chaos, a measure of disorder. The greater the entropy, the more disordered the system; the smaller the entropy, the more ordered the system. Everything you can see and think of has entropy. What does entropy manifest in our world? A room gets messier if not tidied up, a cup of water left on the table will always approach room temperature, electronic products will become outdated over time, and people tend to become lax if not careful. These are all caused by increasing entropy. Any closed system, without external work being done, will tend to chaos and disorder, ultimately leading to death. So when the room is messy, you tidy it up; when the water cools, you heat it; if electronic products can be repaired, you repair them; if you become lazy, you remind yourself to be more disciplined. All of this is an attempt to combat increasing entropy. Schrödinger's cat once said, "Life feeds on negative entropy; the meaning of life is the continuous process of combating increasing entropy." However, you can only combat limited increasing entropy.

You cannot create a system without loss; entropy constrains you. Energy cannot be created or destroyed, and entropy prevents you from creating a machine with a 100% conversion rate, so there is no perpetual motion machine.

Entropy is a universal law.
The translator's introduction in Yang Jingnian's version also discusses "The Theory of Moral Sentiments," with views similar to Tang Risong's, so I will not elaborate further.
Scholars have long debated this.
I personally dislike dualistic views; I believe the inherent flaws of dualistic views are significant.

Many translators, not just Tang and Yang, have emphasized "The Theory of Moral Sentiments." I thought about it and there may be this layer of reason behind it: they are all translators, and their works are written for Chinese readers. We Chinese have our own culture and context. It is equivalent to saying that they can only do linguistic translations, but we still lack a cultural translation. You need a book in the humanities and social sciences to understand its culture. Otherwise, if you only have a linguistic translation of "The Wealth of Nations," you cannot understand its culture.

For example, early Qing Dynasty people viewed the French Revolution as just an ordinary civil uprising. In the 19th century, our ancestors would not use the word "revolution" to describe that history; instead, they understood it as a simple change of dynasties. In the early 19th century, there was a saying circulating in the country about the great chaos in France, describing the French Revolution as a popular uprising, the result of which was not social change but the rise of a new monarch. They said that after the North American War, France fell into crisis, and the king had to convene a meeting. The people loyally participated in the meeting, but unexpectedly, there were treacherous ministers and evil people who incited the masses to kill King Louis XVI. Fortunately, a new son of destiny, Napoleon, saved the situation, replaced the rebels, stabilized order, and became the new monarch.
In other words, at a certain period, in the eyes of our ancestors, it was not called the French Revolution but the French great rebellion or the French great chaos. Our historical view in China is cyclical; we segment our country's history based on the changes of dynasties: the Three Sovereigns and Five Emperors, Xia, Shang, Zhou, the Spring and Autumn Period, and the Warring States Period. The Qin, Han, Three Kingdoms, Eastern and Western Jin, Southern and Northern Dynasties are oppositional. The Sui, Tang, Five Dynasties, and Ten Kingdoms, Song, Yuan, Ming, and Qing emperors rest. Right? Our segmentation of history is based on the change of dynasties, to put it bluntly, based on which family is the emperor; it is a cyclical historical view.
However, Western historical segmentation is generally divided into classical times, the Middle Ages, the Renaissance, the Enlightenment, and the Industrial Age.

Their historical segmentation usually cuts based on major social changes, economic developments, and cultural trends.

The huge cultural differences lead us to look at facts and not understand them.

Many Western countries, including the United States, have taken different paths from us. Their development first had great ideas, and then those ideas were imposed on the world, forming new productive forces and changes in production relations. However, many times, in our learning process, we only learn their results and do not learn their ideas.

Now, many people with a bit of education have problematic philosophical views, and they may not even realize the problems with their philosophical views. Because if we do not study additionally, our scientific realism is almost established during the process of learning Newtonian mechanics.

Newtonian mechanics believes that the universe is composed of isolated atoms, and the only intrinsic connection between them is the interaction between atoms. Atoms exist deterministically at specific spacetime locations, and their motion follows determined trajectories. In such a conceptual background, studying these things involves using mathematical equations to solve one trajectory after another, assuming that our universe follows and must follow local causality.

This realism translates into a philosophical perspective: if you agree with the scientific realism of Newtonian mechanics, then the universe is completely predictable in your eyes. This is mechanism; if you go online, you will find that 80% of people are mechanistic. Because as long as you know the position, velocity, momentum, and other information of an atom, and know what kind of dynamic equations it satisfies, you can predict its state at any time. As a result, human thought has gone down a one-way street; as long as there is information, it directly seeks results.

There is a hypothetical deity called Laplace's demon, which emerged based on this theory. If Newton's equations can predict the trajectories of all things, everything can be calculated. Then there would be a super invincible computer that could calculate everything in the future. (It calculated that the answer is 42!) Without further ado, just from the perspective of economics, there cannot be anything predictable in a market economy; otherwise, the market would not exist.
However, Newton's laws have been successful, and the world changes under his theories have been enormous. However, the deterministic atomic worldview of Newtonian mechanics is incompatible with the worldview of quantum mechanics in the new era.

Everyone has learned about the double-slit experiment with a single electron, where an electron passes through two slits simultaneously, which is very counterintuitive. The concept that an atom exists deterministically at a specific point in spacetime (let alone having a determined trajectory) does not hold in quantum mechanics. Therefore, our observation of the world will always be limited; we will never have universally applicable truths or determined laws. Many people are obsessed with finding patterns and truths, love to see those famous quotes, and apply them everywhere. Including many naive individuals, they always want to find a certain method to make money, but trying to find an unchanging law to guide your investment operations in an ever-changing market is itself a foolish act, which is why they are naive.
The realism of Newtonian mechanics does not violate Bell's inequality, while quantum entanglement does violate Bell's inequality. Once the existence of quantum entanglement is proven, the non-local holistic realism of quantum mechanics should replace the former.

However, in this series of videos discussing "The Wealth of Nations," the realism of Newtonian mechanics is sufficient, as "The Wealth of Nations" is deeply influenced by Newton's natural philosophy.
First, Newtonian mechanics provided a rational and systematic worldview for the Enlightenment of the 18th century, demonstrating that the laws governing the operation of nature can be explained through mathematics and experimental methods. This scientific method and rationalist thinking indirectly influenced economists of the same era, including Adam Smith. Although Smith directly studied economic phenomena, he also employed similar logic and analytical methods when analyzing market mechanisms and human behavior. This methodological resonance partly stems from the influence of Newtonian mechanics on the thinking of intellectuals at that time.

Secondly, Newton's works and subsequent developments in physics inspired 18th-century scholars to seek "social laws" beyond natural laws. Economists like Adam Smith attempted to apply the methods of natural sciences to the study of social and economic phenomena, hoping to find rules and principles to guide economics and policy-making. Therefore, although "The Wealth of Nations" does not directly apply the formulas or laws of Newtonian mechanics, Smith's way of thinking and methods of analyzing economic systems were undoubtedly influenced by the scientific methodology of that time.

The term "invisible hand" appears in the fourth book, second chapter of "The Wealth of Nations," when he discusses how the market economy self-regulates to meet social needs. Smith explains that even when individuals act out of self-interest, they inadvertently promote the overall welfare of society through the workings of the market mechanism. This is the principle of the "invisible hand," which means that individuals pursuing their interests indirectly promote the economic welfare and effective allocation of resources for society as a whole.

This concept explains why, in a market economy, individuals and enterprises can inadvertently promote economic efficiency and effective resource allocation while pursuing their own interests. This has become a cornerstone of later theories of free market economics.

Smith emphasizes the importance of the "invisible hand" and free competition in resource allocation within market mechanisms, opposing excessive government intervention. This idea has a significant impact on modern free market economics, although today's economic policies and practices differ in many ways, many fundamental principles are still respected.

Ten Principles of Economics#

• People face trade-offs.
• The cost of something is what you give up to get it.
• Rational people think at the margin.
• People respond to incentives.
• Trade can make everyone better off.
• Markets are usually a good way to organize economic activity.
• Governments can sometimes improve market outcomes.
• A country's standard of living depends on its ability to produce goods and services.
• When a government prints too much money, the prices rise.
• Society faces a short-run trade-off between inflation and unemployment.

Marginal Utility of Money#

• Marginal Utility
  Also translated as marginal effect, refers to the additional satisfaction (or decrease) gained from adding (or reducing) one unit of a good or service, which is the slope of the "utility vs. quantity of goods or services" graph.

• Diminishing Marginal Utility
  Economics generally holds that as the quantity of a good or service increases, marginal utility will gradually decrease, known as the law of diminishing marginal utility.

• Total Product (TP): The top curve shows how total output changes as the amount of labor (Labor) increases. Total output typically increases rapidly with less labor, slows down after reaching a certain point, and may eventually decline. This trend occurs because initially, additional labor can effectively utilize fixed capital (such as machinery), but as labor input continues to increase, fixed capital becomes a limiting factor, leading to diminishing returns for each additional unit of labor.

• Marginal Product (MP): The bottom red curve represents marginal product, which is the additional output gained from adding one unit of labor input. Marginal product initially increases with labor input, reaches a maximum (point α, MP_MAX), and then begins to decline. When marginal product drops to zero, total output reaches its maximum. The decline in marginal product begins due to the limitations of fixed capital, making it difficult for each additional unit of labor to effectively combine with existing capital, resulting in a decrease in the output gained from each additional unit.

• Average Product (AP): The bottom gray curve represents average product, which is the average output per unit of labor input. When marginal product is greater than average product, average product rises; when marginal product is less than average product, average product declines. Average product reaches its maximum (point β, AP_MAX) when it equals marginal product.
  In the graph, α, β, and Y mark the levels of labor input at which marginal product is maximized, average product is maximized, and total product is maximized (or marginal product is zero), respectively. These points mark the efficiency and productivity levels at different stages of the production process.

• α: Maximum marginal product, indicating the most efficient use of labor in the production process.

• β: Maximum average product, indicating the point at which average output per worker is maximized.

• Y: Maximum total product, or the point where marginal product is zero, indicating the amount of labor input at which total output is maximized; beyond this point, total output will begin to decline.

Marginal Utility of Money#

Refers to the additional satisfaction or utility gained from each additional unit of money as income increases. This concept helps explain why the same amount of money has different meanings for people at different income levels and why individuals with lower incomes often value each unit of money more highly than those with higher incomes.

Diminishing Marginal Utility of Money#

• The marginal utility of money typically follows a diminishing pattern. This means that as an individual's total income or wealth increases, the satisfaction or utility gained from each additional unit of money gradually decreases. For example, for a person with a monthly income of only $1,000, earning an additional $10 may mean being able to purchase more basic necessities, thus having relatively high value and utility. In contrast, for a person with a monthly income of $10,000, the satisfaction gained from an additional $10 is relatively low.

Applications of Marginal Utility of Money

• Social Welfare Policies: Understanding the marginal utility of money helps in formulating effective tax and social transfer payment policies. For example, imposing higher tax rates on high-income groups and using those resources to support low-income groups can increase overall social welfare because low-income groups derive higher marginal utility from each unit of money.

• Consumption Decisions: Individuals often consider the marginal utility gained from additional spending when making consumption decisions. This can explain why people may choose to save or invest rather than increase consumption once their basic needs are met.

• Price Theory: When understanding and setting product prices, businesses need to consider consumers' sensitivity to price changes, which largely depends on the marginal utility of money. Small changes in price may have different impacts on consumers at different income levels.

The History of Money#

1. Early Forms of Money
   a. Barter: Early human societies conducted transactions through direct exchanges of goods, but this faced the problem of "double coincidence of wants."
   Double coincidence of wants: 1. Matching value scales
   2. Time matching
   3. Space matching

Commodity Money: Items like salt, shells, livestock, etc., gradually became used as exchange tools, possessing intrinsic value.

2. The Emergence of Metal Money
   a. Precious metals like copper, silver, and gold became important forms of money due to their advantages of portability, divisibility, and durability.
   b. The invention of coinage: Standardized coins minted by governments and empires ensured the quality and face value of money.

3. The Rise of Paper Money and Credit Money
   c. Paper Money: The earliest was invented in China during the Tang and Song dynasties and gradually spread worldwide. Government-issued paper money represents a stock of precious metals, solving the difficulty of carrying large amounts of metal money.
   d. Banknotes and Checks: Banks introduced the concept of credit money, issuing notes that could be redeemed for metal money at any time.

4. Modern Forms of Money:
   a. Fiat Money: No longer backed by precious metals but rather by government credit.
   b. Electronic Money: New forms of money such as electronic payments, credit cards, and digital wallets are gradually becoming popular, reducing the use of paper money and coins.

Definition of Money:
● A set of assets that people frequently use to purchase goods and services in the economy.
Money: You can use it for transactions without paying interest.

Levels of Money Supply:#

● M0: Usually refers to cash in circulation, i.e., currency, excluding deposits in the banking system. It is the most basic form of money.
● M1: Includes currency (cash) and demand deposits, which can be used for payments and transactions at any time, having high liquidity.
● M2: Includes M1 plus short-term deposits, such as time deposits and savings deposits. Although its liquidity is lower than M1, it can still be converted into currency in the short term.
In currency, it is also categorized by material form into coins, paper bills, digital currency, etc.

The Three Basic Functions of Money:#

● Medium of Exchange: Money serves as a tool for transactions, reducing the hassle of barter.
● Store of Value: Money can retain its value, allowing people to preserve wealth for future use.
● Unit of Account: Money provides a unified standard for measuring the value of goods and services.

Types of Money#

Source of Value
Commodity Money: Money in the form of goods with intrinsic value.
Fiat Money: Money without intrinsic value, determined by government decree to be used as currency.
Bonds: Pay positive interest but cannot be used for transactions.

Bonds#

1. Bonds are debt securities issued by governments, municipalities, or corporations, paying interest at regular intervals and returning the principal at maturity, making them a stable investment choice.
2. Like other financial assets, bond prices and yields are directly affected by interest rates and economic conditions, but their volatility is often lower than that of cryptocurrencies and stocks.
3. The bond market and its relationship with interest rates can provide insights into current and future economic conditions, influencing investor sentiment towards cryptocurrencies, stocks, and other markets.

Introduction
Bonds are financial instruments that provide a way for governments and corporations to raise funds, offering investors a relatively stable investment choice.

Types of Bonds

1. Government Bonds: Issued by governments, e.g., U.S. Treasury bonds, UK government bonds, and German government bonds.
2. Municipal Bonds: Issued by local governments or municipalities to fund public projects such as schools and highways.
3. Corporate Bonds: Corporations issue bonds to raise funds for expansion, operations, or other business activities.
4. Savings Bonds: Typically small-denomination bonds issued by the government to small investors.

Issuance and Pricing
After issuance, bonds have a face value, coupon rate, and maturity date. The face value is the amount due at maturity, and the coupon rate is the interest rate the issuer pays to bondholders. Bonds are sold in the primary market, then traded in the secondary market.
The primary market is where investors buy bonds directly from the issuer (such as the government or corporation). After the initial sale, bonds are traded among investors in the secondary market, with prices fluctuating due to interest rates, economic conditions, and the issuer's creditworthiness. The secondary market provides liquidity, allowing investors to buy and sell bonds before maturity.

Interest Payments
Bondholders receive interest payments regularly, typically semi-annually or annually. These interest payments are a fixed percentage of the bond's face value. For example, a bond with a face value of $1,000 and a coupon rate of 5% pays $50 annually. Taking U.S. Treasury bonds as an example, a 10-year bond with a coupon rate of 2% would pay $20 annually for a $1,000 bond.

Maturity
The maturity date is when the issuer must repay the bond's face value to the bondholder. Bonds are categorized as short-term (up to 3 years), medium-term (3-10 years), or long-term (over 10 years). For example, a short-term corporate bond issued by Apple might have a maturity of 2 years, while a medium-term municipal bond in Los Angeles might have a maturity of 7 years. Long-term bonds, such as 30-year U.S. Treasury bonds, mature after thirty years.

The Role of Bonds in Financial Markets
Safe-Haven Asset
Bonds, especially government bonds, are often seen as safe-haven assets. Compared to cryptocurrencies and stocks, they tend to have lower volatility and more predictable returns. During periods of economic uncertainty or market volatility, investors often turn to bonds.

Portfolio Diversification
Incorporating bonds into a portfolio helps diversify risk. While stocks can offer high returns, they also tend to be riskier. Bonds can provide balance, reducing the overall financial risk of the portfolio.

Interest Rate Indicator
Bond prices and yields are influenced by interest rates. When interest rates rise, bond prices fall, and vice versa. This inverse relationship makes bonds a key indicator of interest rate trends and monetary policy.

Monetary Theory#

1. Neutrality of Money Theory
   ● The neutrality of money is an important assumption in classical economics. It posits that changes in the money supply only affect nominal variables in the economy, such as price levels or nominal wages, but do not affect real variables, such as real output, employment, consumption, and productivity.
   ● According to this view, an increase in the money supply will lead to a rise in prices, i.e., inflation, but this is merely a change in the nominal price level and does not alter the actual purchasing power or productive capacity of the economy. For instance, nominal wages may rise, but real purchasing power remains unchanged because prices are also rising.

2. State Theory of Money
   Also known as the state currency theory or national currency theory, it is a monetary theory that asserts that the value and legitimacy of money derive from the authority of the state, rather than from the intrinsic value of the money itself (such as the value of precious metals). According to this theory, money is a credit instrument issued and enforced by the state, and its value depends on the state's support and its mandatory use in taxation and payments.

3. Core Ideas of the State Theory of Money
   ● The authority of the state determines the value of money: The state theory of money argues that the value of money is not determined by its intrinsic value (e.g., gold or silver) but is conferred by the state's laws and power. In other words, the value of money comes from the trust and coercive power of the state, especially the requirement for citizens to use specific money to pay taxes.
   ● Money as a Debt and Credit Instrument: According to this theory, money can be viewed as a debt issued by the state, providing society with a universally accepted means of payment. Citizens and businesses accept this money because the state mandates it as the only legal currency and requires its use for taxes or other legal obligations.

4. Historical Origins of the State Theory of Money
   ● The ideas of the state theory of money can be traced back to the late 19th and early 20th centuries, particularly to German economist Georg Friedrich Knapp. In his 1905 work "The State Theory of Money," Knapp systematically presented this viewpoint, arguing that the essence of money is a payment tool issued and enforced by the state.
   ● Knapp's theory emphasizes that the legitimacy of money derives from the coercive power of the state, which can enforce its currency's circulation domestically through legislation and taxation systems, independent of the intrinsic value of the money.

5. Main Characteristics of the State Theory of Money
   ● The Legal Nature of Money: In the state theory of money, the circulation and use of money are enforced by the state through law. The state issues money and designates it as the only legal means of payment, which citizens and businesses must use to fulfill their debts and tax obligations.
   ● Taxation is Key to Money's Value: The state theory of money posits that the state confers value on money through the tax mechanism. The state requires citizens to pay taxes in money, thus making money valuable as it is the only means to fulfill legal obligations (such as paying taxes). The demand for taxes creates the impetus for money's circulation, endowing it with exchange value.
   ● Money is Not Determined by Intrinsic Value: The state theory of money opposes the monetary theories under the gold standard, which assert that the value of money depends on its link to precious metals. Instead, the state theory of money argues that the value of money is entirely determined by the state's laws and its ability to manage the monetary system.

6. The State Theory of Money and Modern Monetary Theory (MMT)
   ● The state theory of money is closely related to Modern Monetary Theory (MMT). Scholars of MMT largely build upon the ideas of the state theory of money to further develop the understanding of money.
   ● According to MMT, the state is the issuer of money, not the user. The state can regulate the economy by issuing money, and under the modern monetary system, the state does not need to worry about fiscal deficits because it can create money to pay its debts. The key is that the state manages the money supply through taxation and government spending to ensure the stable operation of the economy.
   ● In the framework of MMT, the role of taxation is not directly to finance the government but to control the circulation of money, ensuring that money is in demand and maintaining its value.

7. The State Theory of Money Compared to Other Monetary Theories
   ● Gold Standard (Commodity Money Theory): Traditional monetary theories like the gold standard argue that the value of money should be determined by its intrinsic value (such as gold or silver). In contrast, the state theory of money completely discards this view, emphasizing that the value of money is determined by the state's laws rather than being backed by any physical asset.
   ● Credit Money Theory: The credit money theory shares some similarities with the state theory of money, particularly in viewing money as a debt or credit instrument. Both theories consider money as a tool operating through a credit system rather than being determined by intrinsic value. However, the state theory of money places greater emphasis on the central role of the state in the monetary system, especially in creating and maintaining the value of money through taxation and legislation.

8. Real-World Applications of the State Theory of Money
   ● Modern Fiat Money: The ideas of the state theory of money have profoundly influenced the fiat money systems in modern economies. Today, almost all countries' currencies are fiat money, no longer linked to precious metals but entirely reliant on the legal authority and monetary policy of the state to maintain their value.
   ● The Role of Central Banks: Modern central banks manage the economy by regulating the money supply, controlling inflation, and setting interest rates, which aligns with the ideas of the state theory of money. In this framework, the state maintains the stability of money through the operations of the central bank, ensuring the healthy functioning of the economy.

9. Limitations of the State Theory of Money
   ● Risks of Inflation and Excessive Money Printing: Critics of the state theory of money and MMT point out that the state's ability to create money through printing could lead to severe inflation or hyperinflation. If the state excessively issues money while the supply of goods and services in the economy cannot keep pace with the growth of money, the purchasing power of money will rapidly decline, leading to soaring prices.
   ● International Acceptance of Money: While the state theory of money emphasizes that the value of money is determined by the state, in international trade and global financial markets, the value of money is also influenced by other factors, including market confidence in the country's economy, foreign exchange reserves, and international credit ratings. Therefore, the acceptance of a country's currency in the global market may not be entirely determined by the state's coercive power.

Modern Monetary Theory (MMT)#

1. Core Views of MMT
   a. The government is the sole issuer of money
   ● MMT posits that countries with sovereign currencies (i.e., those with their own currencies not pegged to other foreign currencies, such as the United States, the United Kingdom, Japan, etc.) have the ability to meet any domestic fiscal needs by issuing money through their central banks.
   ● The government does not rely on taxes or debt to obtain funds; it can directly pay for public expenditures by issuing money. The role of taxes is primarily to manage inflation rather than to "fund" the government.

b. Fiscal deficits are not a problem
● Within the MMT framework, fiscal deficits are not something the government should avoid. On the contrary, MMT argues that government deficit spending can directly provide liquidity and wealth to the private sector. As long as this spending does not lead to uncontrolled inflation, the existence of deficits will not harm the economy.
● This view contrasts sharply with traditional economists' perspectives on deficits and debt, which typically argue that long-term fiscal deficits increase the national debt burden and constrain future government spending.

c. The Role of Taxes
● In MMT, the primary function of taxes is not to provide revenue for the government but to regulate demand and control inflation. Taxes can reduce the money supply in the economy, helping to stabilize prices.
● Another role of taxes in MMT is to maintain demand for the national currency, as people must earn that currency to pay taxes, ensuring its circulation within the economy.

d. Employment and Government Spending
● MMT advocates for maintaining full employment through government spending. Supporters of MMT propose employment guarantee programs, where the government can act as the "employer of last resort," providing jobs for the unemployed through public projects to ensure a high employment rate across society.
● By increasing public spending, the government can directly create jobs, especially during economic downturns and insufficient demand, where government spending can stimulate the economy.

The Trilemma#

The trilemma is a theory in international economics that posits that it is impossible to simultaneously achieve monetary policy independence, exchange rate stability, and capital mobility. You can only choose two:
● If you choose exchange rate stability and capital mobility, you will sacrifice monetary policy independence because the central bank must prioritize maintaining exchange rate stability.
● If you choose monetary policy independence and capital mobility, you must give up exchange rate stability, allowing the exchange rate to float freely.
● If you choose monetary policy independence and exchange rate stability, you must implement capital controls to restrict capital flows.

2. Differences Between MMT and Traditional Economics
   a. Fiscal Deficits and Debt
   ● Traditional economics holds that government fiscal deficits lead to accumulated debt, which could eventually trigger a government debt crisis. However, MMT argues that countries with their own currencies can repay debts indefinitely through central bank money issuance, so deficits do not constitute a crisis.
   ● In traditional economics, excessive fiscal deficits lead to rising interest rates and "crowding out," meaning government borrowing occupies funds in the market, suppressing private sector investment. However, MMT supporters argue that as long as there are idle resources and unemployment in the economy, government spending will not cause crowding out; rather, it will stimulate economic growth by increasing overall demand.

b. The Role of Government
● Traditional economics advocates for maintaining fiscal discipline, reducing deficits, and relying on the market to achieve efficient resource allocation. In contrast, MMT argues that the government is the issuer of money, possessing the initiative to regulate the economy through monetary and fiscal policies to achieve social goals (such as full employment and price stability).

c. Risks of Inflation
● Traditional views worry that excessive government spending and money issuance could lead to severe inflation or even hyperinflation. However, MMT supporters acknowledge the risk of inflation but argue that the government can control inflationary pressures by increasing taxes and reducing spending. As long as inflation remains within controllable limits, government spending will not harm the economy.

Stagflation#

Stagflation is a rare economic phenomenon characterized by stagnant economic growth (or slow growth) occurring simultaneously with inflation and high unemployment. Stagflation breaks the traditional economic theory, which typically posits a negative correlation between inflation and unemployment, meaning rising inflation usually accompanies economic growth and declining unemployment.

Key Features of Stagflation

1. Stagnant Economic Growth: During stagflation, overall economic growth nearly halts, with GDP growth slowing or entering recession.
2. High Inflation: Price levels continue to rise, with persistent high inflation rates, leading to a decrease in purchasing power.
3. High Unemployment: Despite high inflation, unemployment rates do not decrease but remain high, with unemployment and inflation coexisting.

Differences Between Monetary Policy and Fiscal Policy#

Liquidity Trap#

A liquidity trap refers to a situation where nominal interest rates are lowered to the point where they cannot be reduced further, even approaching zero. Due to the effect of a certain "https://baike.baidu.com/item/%E6%B5%81%E5%8A%A8%E6%80%A7%E5%81%8F%E5%A5%BD/2463211?fromModule=lemma_inlink," people prefer to hold wealth in cash or savings rather than investing it as capital or spending it on personal enjoyment. Any increase in the money supply by the state will be absorbed as "idle capital," as if it has fallen into a "liquidity trap," thus having no impact on overall demand, income, or prices.

Qualitative Easing and Quantitative Easing (QE)#

Quantitative easing (QE) and qualitative easing are a series of unconventional monetary policies adopted by central banks when traditional monetary policy tools become ineffective (such as when interest rates approach zero). Although both aim to inject liquidity into the financial market to stimulate the economy, they differ in approach and focus.

1. Quantitative Easing (QE)
   ● Definition: Quantitative easing refers to the central bank injecting funds into the market by purchasing large amounts of government bonds and other high-quality financial assets (such as mortgage-backed securities) to increase the money supply, stimulate economic growth, and lower long-term interest rates.
   ● Focus: The core of quantitative easing is "quantity," meaning increasing the total amount of money in the market through large-scale asset purchases to lower borrowing costs and promote consumption and investment.
   ● Implementation:
   ○ The central bank purchases large quantities of government bonds and other financial assets in the open market, injecting funds into banks and financial institutions, increasing their reserves, and providing them with more funds for lending.
   ○ By purchasing large amounts of assets, the prices of these assets are driven up, lowering their yields (i.e., long-term interest rates), thereby encouraging businesses and consumers to borrow and spend.
   ● Example: After the 2008 global financial crisis, the Federal Reserve, European Central Bank, and Bank of Japan implemented large-scale quantitative easing policies to help economic recovery and control instability in financial markets.

2. Qualitative Easing
   ● Definition: Qualitative easing focuses on changing the types and risk levels of assets purchased by the central bank, rather than merely increasing the scale of asset purchases. By purchasing a broader range of financial assets, including higher-risk assets, the central bank aims to influence the prices and risk premiums of different types of assets, further stimulating economic activity.
   ● Focus: The core of qualitative easing is "quality," meaning changing the types and quality of purchased assets. The central bank may not only buy government bonds but also higher-risk assets such as corporate bonds, business loans, and even stocks to stabilize financial markets, especially those under stress.
   ● Implementation:
   ○ The central bank purchases a wider variety of assets, particularly higher-risk assets, to lower the risk premiums of different asset classes, thus supporting broader market stability and economic recovery.
   ○ Qualitative easing can lower the financing costs of corporate bonds and high-risk assets, helping businesses access funds more easily and promoting activity in capital markets.
   ● Example: The Bank of Japan gradually expanded the types of assets it purchased in its monetary policy after 2013, not only buying government bonds but also corporate bonds, commercial paper, and even exchange-traded funds (ETFs). This policy is seen as a typical application of qualitative easing.

3. Differences Between Quantitative Easing and Qualitative Easing
   | Characteristics | Quantitative Easing (QE) | Qualitative Easing |
   |------------------|--------------------------|---------------------|
   | Focus | Increase the total amount of money in the market ("quantity") | Change the types and quality of purchased assets ("quality") |
   | Assets Purchased | Mainly government bonds and other high-quality assets | Broader assets, including corporate bonds, stocks, mortgage-backed securities, etc. |
   | Goals | Lower long-term interest rates, increase market liquidity, stimulate investment and consumption | Lower financing costs in broader markets, especially in high-risk segments |
   | Risk | Relatively low risk, as most assets are government bonds | Higher risk due to the purchase of higher-risk financial assets |
   | Applicable Scenarios | When interest rates are close to zero, to further increase the money supply and stimulate the economy | When structural issues are severe, liquidity is already sufficient, but support is still needed for high-risk segments |

4. Common Goals of Qualitative and Quantitative Easing
   ● Increase Market Liquidity: Whether through qualitative or quantitative easing, the core goal is to inject large amounts of liquidity into the market, reducing the risk of credit tightening and promoting the flow of funds.
   ● Lower Financing Costs: By purchasing different types of assets, both policies aim to lower the financing costs in the market, driving corporate investment and consumption growth, helping the economy recover from downturns.
   ● Address Economic Crises: Both policies are typically used when interest rates are already close to zero and traditional monetary policy tools are ineffective, serving as unconventional tools for central banks during economic crises or extreme economic conditions.

5. Challenges and Risks in Implementation
   ● Asset Price Bubbles: Whether through quantitative or qualitative easing, the influx of large amounts of funds into the market may inflate asset prices, leading to excessive speculation in financial markets and forming asset bubbles. Once the central bank halts easing policies, the bubble may burst, causing market turmoil.
   ● Expansion of Central Bank Balance Sheets: Long-term large-scale asset purchases significantly expand the central bank's balance sheet, increasing the risks it bears. If the purchased high-risk assets lose value, the central bank may face financial risks.
   ● Inflation Risks: If easing policies are overused, they may lead to excessive money supply in the market, triggering inflationary pressures and undermining economic stability.

Reserves#

Reserves refer to the funds that commercial banks must hold at the central bank according to legal or regulatory requirements to ensure that banks have sufficient funds to meet customer withdrawal demands and other unexpected funding needs. Reserves are an important financial stability mechanism in the banking system, aimed at preventing excessive lending by banks and maintaining stability in the financial system.

Reserves are typically divided into two types: required reserves and excess reserves.

1. Required Reserves
   ● Required reserves refer to the portion of deposits that banks must keep at the central bank according to the ratio set by the central bank. This ratio is known as the reserve requirement ratio or deposit reserve ratio, determined by the central bank and used to control the lending capacity of banks.
   ● Role: The main role of required reserves is to ensure that there is sufficient liquidity in the banking system, preventing the risk of bank runs (i.e., when many depositors simultaneously request withdrawals). It helps prevent excessive lending or disruptions in the funding chain during financial crises.
   ● Example: If the central bank sets a reserve requirement ratio of 10%, then after receiving a deposit of 1 million yuan, a commercial bank must deposit 100,000 yuan at the central bank as required reserves. The remaining 900,000 yuan can be used for loans and investments.

2. Excess Reserves
   ● Excess reserves refer to the portion of funds that commercial banks hold at the central bank beyond the required reserves. Commercial banks may choose to deposit more funds at the central bank as an additional safety buffer.
   ● Role: Excess reserves provide banks with additional liquidity, helping them respond to unexpected funding demands or uncertainties. Although banks can choose to use this portion of funds for loans or investments, they may prefer to hold excess reserves to reduce risk during times of economic uncertainty.
   ● Impact of Negative Interest Rates: In certain economic conditions, the central bank may implement negative interest rates on excess reserves, meaning banks must pay fees on their excess deposits at the central bank. This is intended to encourage banks to invest excess funds into the economy, increasing credit and promoting consumption and investment.

3. Regulatory Role of Reserve Requirements
   ● Monetary Policy Tool: The central bank influences banks' lending capacity and money supply by adjusting reserve requirements. If the central bank raises the reserve requirement ratio, banks must deposit more funds at the central bank, reducing the funds available for lending, thus suppressing the money supply and credit activities in the economy. Conversely, lowering the reserve requirement ratio can release more funds into the market, stimulating economic growth.
   ● Impact on Bank Lending: Required reserves directly affect the amount of funds banks can lend. When the reserve requirement ratio is high, the amount of funds available for lending decreases, restricting lending activities; when the reserve requirement ratio is lowered, banks have more funds available for loans, increasing credit expansion.

4. Significance of Reserves
   ● Preventing Financial Risks: The existence of reserves helps banks respond to unexpected withdrawal demands and uncertainties in financial markets, preventing banks from facing crises due to insufficient liquidity and ensuring stability in the banking system.
   ● Monetary Policy Regulation Tool: The central bank controls the money supply in the market by adjusting reserve requirements, influencing economic growth, inflation, and other economic indicators.
   ● Maintaining Financial Confidence: The reserve system increases the safety of the banking system, enhancing public confidence in the financial system and reducing the likelihood of mass withdrawals and financial crises.