Class 4 - Econ 350 U.S. Financial Systems, Markets and...

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Econ 350 U.S. Financial Systems, Markets and Institutions Class 4 Econ 350: U.S. Financial Systems, Markets and Institutions Class 4: Money and its history Welcome back. I hope you enjoyed the weekend. We often take the importance of money for granted. I don’t mean personally. Most of us know the difference between having money in our pockets and not. What I mean is that we often fail to appreciate the social, cultural, political, and economic importance of money. Throughout history, the type of payment system in effect at the time has had profound impacts on the character of civilization. We will explore these ideas in class today. In addition, we will examine the functions of money and how the Fed measures the amount of money in circulation at a given point in time. Class today will first look at the definition of money and then describe the functions of money. Next, we will show how the Fed measures money using the concepts of M1, M2, and M3. Finally, we will briefly explore the history of money and go on a virtual field trip. Class Objectives After today’s class, you should -- know the definition of money and its functions. -- understand the concepts of liquidity, fungibility and relative prices. -- be able to describe M1, M2, and M3. -- appreciate the importance of money and payment systems throughout history. -- understand Gresham’s law. Money Money : is any asset that is generally acceptable in exchange for goods and services or as payment for debt. Money is any asset that everyone is willing to accept. This idea of acceptability is known as liquidity. Dollar bills are liquid because we are all willing to take them in payment, even though they have no intrinsic value. Throughout history many items have functioned as money, from clam shells to cigarettes, as we will discuss below. Liquidity: the acceptability of an asset as a medium of exchange. Functions of Money Generally, money has four functions, but some authors (including Mishkin) only list the first three. They are: 1. a medium of exchange 2. a unit of account 3. a store of value 4. a standard of deferred payment 20
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Econ 350 U.S. Financial Systems, Markets and Institutions Class 4 We will discuss each in turn. Medium of exchange Perhaps the most important function of money is to act as a medium of exchange, or to facilitate trade by reducing the transactions cost of exchange. It is often said that money acts as a lubricant in the economy. In the same way that oil acts as a lubricant to help an engine run more smoothly, money acts as a lubricant to help the economy run more smoothly. It does this by reducing the necessity for barter. Barter, or exchanging one good or service for another good or service, is often difficult and time consuming. By acting as a medium of exchange, money helps to avoid the necessity of bartering. Barter exchange requires a double coincidence of wants. In order to be willing to barter, you must have what I want and I must have what you want. If I cannot find someone that
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This note was uploaded on 05/09/2009 for the course ECON 350 taught by Professor Christianson during the Spring '08 term at Binghamton University.

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Class 4 - Econ 350 U.S. Financial Systems, Markets and...

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