lecture9 - Agenda What Is Money? The Asset Market, Money,...

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1 9-1 The Asset Market, Money, and Prices, Part 1 9-2 Agenda • What Is Money? • The Demand for Money 9-3 What Is Money? Money is any asset that is widely used and accepted as payment. 9-4 What Is Money? • The three functions of money: ¾ Medium of exchange . • Money is used to make (and finalize) transactions. ¾ Unit of account. • The basic unit for measuring economic value. ¾ Store of value. • Money can be used to hold wealth.
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2 9-5 What Is Money? • Measuring money—the monetary aggregates: ¾ Distinguishing what assets count as money from those that do not is sometimes difficult. ¾ Two monetary aggregates (or measures): •M1 •M2 9-6 What Is Money? • Measuring money—M1: ¾ M1 consists of: • Currency and traveler’s checks held by the public. • Demand deposits (which pay no interest). • Other checkable deposits (which may pay interest). ¾ All components of M1 are used in making payments, so M1 is the closest money measure to our theoretical description of money. 9-7 What Is Money? • Measuring money—M2: ¾ M2 consists of: •M1 , • Savings deposits, • Small (< $100,000) time deposits, • Non-institutional MMMF balances, and • Money-market deposit accounts (MMDAs). 9-8 Table 7.1
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9-9 What Is Money? • The money supply ( M ): ¾ The money supply or money stock is the amount of money circulating in the economy. • Owned by the non-bank public. 9-10 What Is Money? • The money supply ( M ): ¾ Where does money come from? • Currency and coins are issued by the government. • “Other” money is issued by the financial system. – But heavily influenced by the central bank. ¾ The amount of money in circulation in the economy is controlled by the central bank. 9-11 What Is Money? • The money supply ( M ): ¾ The central bank changes the money supply through open (or closed) market operations. Open market operations are the buying and selling of financial assets by the central bank in the open market. Closed market operations are the buying and selling of financial assets by the central bank directly from the government. 9-12 What Is Money? Open market operations : ¾ To increase the money supply, the central bank buys financial assets from the public with newly created money. •Th i s i s an open-market purchase .
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lecture9 - Agenda What Is Money? The Asset Market, Money,...

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