Lectures Week 9 - SCHOOL OF ECONOMICS This Topics Outline...

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4/10/2016 1 © Playconomics, LHS E CON 1012 P RINCIPLES O F E CONOMICS T OPIC 9 – M ONEY AND I NFLATION S CHOOL OF E CONOMICS This Topic’s Outline Money and Inflation (Chapter 9) What is Money? Financial Institutions Monetary Policy Commercial Banks and the Creation of Money Money Market Inflation Tutorial Assignment This week’s questions are due Friday by Midnight Questions for next week will be posted this week, submission link available from this Sat, due next Friday at 6pm Playconomics There are no ‘macro’ islands to play so keep working through S&D, Equilibrium, Perfect Competition and Monopoly … then International Trade 2 © Playconomics, LHS Properties of Money Three key properties: 1. Medium of Exchange - we use money to buy things and we can get paid with it. 2. Store of Value - if we have more goods and services to sell today than what we want to buy, we can put money under the mattress and use it at a later date. 3. Unit of Account - our accounting friends find it easier to have a single unit to put on their spreadsheets. 4 © Playconomics, LHS Features of Money Many items could be money. What features matter: acceptable by most people durable transportable standardised divisible 5 © Playconomics, LHS Commodity & Fiat Money 6 Definitions Commodity Money: physical money that has intrinsic value. Fiat Money: physical money that has no intrinsic value but attains value because of people's beliefs. Fiat money is typically issued by a country’s central bank, eg. the Reserve Bank of Australia , because they are best placed to ensure the five features of money are met © Playconomics, LHS
4/10/2016 2 Monetary Base 7 Why is the definition of money not simply ‘notes and coins’? Think about the ‘medium of exchange’: how many of your recent transactions used physical notes or coins? Narrow definition because banks don’t keep notes to the value of everyone’s deposits in their vaults! Definition Monetary Base: the currency (notes and coins) plus reserves held at the central bank. © Playconomics, LHS Reserve Bank Definitions of Money 8 Definitions M1: is currency plus current deposits at commercial banks. Current deposits are the ones you can draw upon instantly with no penalty (e.g. from Cheque or Savings at the bank machine) . M3: is M1 plus other deposits at commercial banks (e.g. term deposits where you pay a small penalty for withdrawing early) plus deposits at other authorised deposit-taking institutions (e.g. credit unions and building societies). © Playconomics, LHS © Playconomics, LHS Measures of Money Supply in Australia M3 is large compared to Money Base & M1 © Playconomics, LHS Financial Institutions Two key players: 1. Commercial Banks - provide financial services (including deposits, loans and investment products) to firms and households.

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