Lecture Notes 7.pdf - Chapter 7 The Asset Market Money and...

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Chapter 7: The Asset Market, Money, and Prices Tingjun Liu FBE of HKU February 13, 2018 T Liu (FBE of HKU) MFIN7007 February 13, 2018 1 / 52
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Chapter Outline ° Asset market and money, money’s functions and measurement in the U.S. ° Factors that affect portfolio allocation and the demand for assets. ° Macro variables that affect the demand for money. ° Fundamentals of asset market equilibrium. ° Relationship between money growth and inflation. T Liu (FBE of HKU) MFIN7007 February 13, 2018 2 / 52
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The asset market and money ° Asset market: the entire set of markets in which people buy and sell real and financial assets, including, for example, houses, gold, stocks, and bonds. ° Money is defined as those assets that can be used in making payments. Historically, gold and silver. In modern economies ° the most familiar forms of money are coins and paper money, or currency. ° checkable deposits, or bank accounts on which checks can be written for making payments. ° Important to understand money because most prices are expressed in units of money, such as dollars and euros. Understanding money is key to understanding the price level and the inflation rate. ° The amount of money may also affect real macro variables such as output and employment. T Liu (FBE of HKU) MFIN7007 February 13, 2018 3 / 52
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Ancient Egyptian Money T Liu (FBE of HKU) MFIN7007 February 13, 2018 4 / 52
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Ancient Money in Rome T Liu (FBE of HKU) MFIN7007 February 13, 2018 5 / 52
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Ancient Money in China T Liu (FBE of HKU) MFIN7007 February 13, 2018 6 / 52
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The functions of money ° Three functions of money: ° Medium of exchange. ° Barter is inefficient—double coincidence of wants. ° Money permits people to trade with less cost in time and effort. ° Money allows people to trade their labor for money, then use the money to buy goods and services in separate transactions. ° Money allows specialization, so people don’t have to produce their own food, clothing, and shelter. T Liu (FBE of HKU) MFIN7007 February 13, 2018 7 / 52
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° (Conti.) Unit of account. ° Money is basic unit for measuring economic value. ° Simplifies comparisons of prices, wages, and incomes. ° The unit-of-account function is closely linked with the medium-of-exchange function. ° Countries with very high inflation may use a different unit of account, so they don’t have to constantly change prices. ° Store of value. ° Money can be used to hold wealth. ° Most people use money only as a store of value for a short period and for small amounts, because it earns less interest other assets. ° Other types of assets (stocks, bonds, or real estate) can also be a store of value and normally pay the holder a higher return than money does. But not a medium of exchange. T Liu (FBE of HKU) MFIN7007 February 13, 2018 8 / 52
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Measuring money—the monetary aggregates ° Distinguishing what is money from what isn’t money is sometimes difficult: ° "Moneyness" is continuos, not binary.
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