econnotestest2 - Money in the economy o Money is the medium...

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- Money in the economy o Money is the medium of exchange Several things served as medium of exchange Cattle, tobacco, metal/coins o money supply- the total debt on the part of government and commercial banks or financial institutions money supply = coins + currency bills + deposits M1= coins + currency bills + checkable deposits o 3 types of checking accounts Ordinary checking account NOW accounts- negotiable order of withdrawal banks can ask to give notice to withdraw money from account. There is a minimum balance requirement and it is interest paying. ATS account- automatic transfer to savings there is a minimum balance and interest M2= M1 + savings deposits of small denominations (less than $100,000) + etc. M3= M2 + savings deposits of large denominations (more than $100,000) + etc L= M3 + SDRs + commercial papers + bankers’ acceptances + Euro dollars + etc. o SDR- special drawing rights issued by the international monetary fund from 1944. it has been a fund of member countries which contribute to it according to a formula. If member contributing more SDRs are offered, they become a popular international medium of exchange. o Commercial paper- bond or ‘I owe you’. Issued by large corporations and traded in comm. paper market o Bankers acceptances- issued by the FI they are very useful for private international transactions o *Eurodollars- dollars deposited anywhere outside of the United States. o In United States 2 departments can create debt on themselves Department of treasury - in charge of minting coins Department of Federal reserve - in charge of printing money - Evolution of money o Historically metal coins served as money the longest because compared to anything else it had special characteristics Divisible Portable Relatively stable Easy to recognize o In early days all metal coins had same value for monetary and non-monetary purposes this is called full bodied commodity money system o As supply of metal increased for comm money system to serve efficiently, coins had to be large and bulky o People started to deposit gold with the treasury. - Gold o Government issued individual gold certificates for depositing gold in its treasury o Gold certificates became a medium of exchange They replaced actual gold coins due to application of Gresham’s Law Gresham’s Law- bad money chases good money out of circulation. o gold certificates were representative commodity money system o government issued gold certificates with 100% backing realized this was not necessary today there is no backing of any precious metal to the money supply - Credit money or Fiduciary money or Fiat money
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o The efficiency worth of modern money supply is possible because… Public confidence Legal tender- a pat of modern money supply that is a legally made medium of exchange Responsibility of monetary policy (Fed reserve supply) to keep money supply growth in a reasonable rate. Government can print more currency and make huge profit (called seignorage)
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