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Unformatted text preview: 1 1 Chapter 7 The Asset Market, Money and Price 2 Introduction ¡ In Chapter 3 & 4, we discussed the labor market and the goods market. ¡ In this chapter, we consider the third market which is the asset market . ¡ By asset market we mean the entire set of markets in which people buy and sell assets, such as gold, houses, stocks and bonds. 3 Introduction ¡ We classify all these assets into two groups: Money and Nonmonetary Assets . ¡ “Money” is defined as assets that are widely used and accepted as payment, such as cash and checks. ¡ Understanding the role of money in the economy is basic to studying issues related to the price level, such as inflation and its causes. 4 Functions of Money ¡ Money has 3 useful functions in an economy: ¢ Store of Value ¢ Medium of Exchange ¢ Unit of Account 5 Money as a Store of Value ¡ Cash and checking accounts are ways of holding wealth. ¡ But other assets such as stocks, bonds and houses can also serve the same purpose and they normally pay a higher return than money does. ¡ So why do people hold money ? 6 Money as a Medium of Exchange ¡ People hold money because it is a highly liquid asset. ¡ Liquidity : how easy an asset can be exchanged for goods, services and other assets. ¡ Money is highly liquid because it is the medium of exchange . 2 7 Money as a Medium of Exchange ¡ In an economy without money, trading takes the form of barter (direct exchange of certain goods for other goods). ¡ If a carpenter wants to have fish as dinner, he will have to find a fisherman who needs something from him in order to trade. ¡ The search is likely to be difficult and time- consuming. 8 Money as a Medium of Exchange ¡ This is called the double coincidence of wants . ¡ Because of this, barter is an inefficient way to trade. ¡ If everyone in the economy agree to use “money” (it can be dollar bills, silver coins, seashells or even cigarettes) as the medium of exchange, then there is no need to search for the perfect trading partner. 9 Money as an Unit of Account ¡ Money is the basic unit for measuring economic value (nominal value). Virtually all prices, wages and debts are expressed in dollars (rather than number of oranges, or ounce of gold ). ¡ The medium-of-exchange and unit-of-account functions of money are closely related. 10 Measuring Money ¡ The official measures of money are known as monetary aggregates . ¡ In the U.S. there are two monetary aggregates, M1 and M2 , which differ in how narrowly they define the concept of money. 11 The M1 Monetary Aggregate ¡ The most narrowly defined official money measure. ¡ It is made up of ¢ currency ¢ travelers’ check held by the public ¢ demand deposits (non-interest-bearing checking accounts) ¢ other checkable deposits....
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This note was uploaded on 08/11/2008 for the course ECON 103a taught by Professor Suen during the Winter '08 term at UC Riverside.
- Winter '08