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Exam2Topics - ECON 1000 Exam#2 Review Money supply M1 coins...

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ECON 1000 – Exam #2 Review Money supply M1: coins + currency bills + travelers’ checks + all checkable deposits (Checkable accounts: ordinary checking account + NOW account + ATM account) M2: M1 + saving deposits of small denomination (less than $100,000) + etc M3: M2 + saving deposits of large denomination + etc L : M3 + Commercial Papers + Banker’s acceptances + SDRs + Eurodollars Evolution of money : commodity money representative commodity money credit money Commodity money: metal coins had value for monetary and non-monetary purposes. Characteristics of metal coins ± divisibility ± non-perishable ± portability ± easy to recognize ± stable supply As the supply of gold increased, the coins had to be bulky, government started issuing gold certificates to replace metal coins. Representative commodity money: Gold certificates replaces the coins. Gold certificates were 100% backed up by gold. Gresham’s Law: Bad money will chase good money out of circulation Credit (fiat or fiduciary) money: Money supply is not backed up by gold. It is backed up by - a part of money supply that is a legally made for exchange - confidence of public in the monetary system - responsibility of the gov’t to keep money supply growth at a reasonable rate The government can print money supply and reap the profits. Functions of money Medium of exchange In a barter economy, we need a double coincidence of wants (high transaction cost). In a money economy, transaction costs are low and # of exchanges is very high. Measure of value: value of goods can be expressed in money terms If there are ‘n’ # of different goods, Money economy : ‘n’ # of prices, Barter economy : ‘n(n-1)/2’ # of prices Store of value: Money is most liquid asset. Medium to transfer payment into future
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History of the Banking System in the US Before 1982: there were 5 different types of financial institutions that fulfilled different roles in the economy and abided by different sets of rules: commercial banks, mutual savings banks, savings & loan associations, credit unions, insurance companies. Late 1970’s:
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Exam2Topics - ECON 1000 Exam#2 Review Money supply M1 coins...

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