Lecture+10 - Economics 102 Lecture 10: Money Money What do...

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1 Economics 102 Lecture 10 : Money LECTURE 10 MONEY 1 Money § What do each of the following have in common? Tobacco Cacao beans Cigarettes A dollar bill § They have all served as money. LECTURE 10 MONEY 2 Money Money Makes the World Go Around § Money has taken many forms. What is money today? § What happens when the bank lends the money you’ve deposited to someone else? § How does the Fed influence the quantity of money?
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2 LECTURE 10 MONEY 3 In this lecture, look for the answers to these questions: § What assets are considered “money”? What are the functions of money? The types of money? § What is the Federal Reserve? § What role do banks play in the monetary system? How do banks “create money”? § How does the Federal Reserve control the money supply? LECTURE 10 MONEY 4 What is Money? Money is any asset that is generally used to buy goods and services. Without money, trade would require barter , the exchange of one good or service for another. Every transaction would require a double coincidence of wants – the unlikely occurrence that two people each have a good the other wants. Most people would have to spend time searching for others to trade with – a huge waste of resources. This searching is unnecessary with money LECTURE 10 MONEY 5 The 3 Functions of Money § Medium of exchange : an item buyers give to sellers when they want to purchase goods and services § Unit of account : the yardstick people use to post prices and record debts § Store of value : an item people can use to transfer purchasing power from the present to the future
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3 LECTURE 10 MONEY 6 The 2 Kinds of Money Commodity money : takes the form of a commodity with intrinsic value Examples: gold coins, cigarettes in POW camps Fiat money : money without intrinsic value, used as money because of gov t decree Example: the U.S. dollar LECTURE 10 MONEY 7 The Money Supply § The money supply (or money stock ): the quantity of money available in the economy § What assets should be considered part of the money supply? Here are two candidates: Currency : the paper bills and coins in the hands of the (non-bank) public Demand deposits : balances in bank accounts that depositors can access on demand by writing a check LECTURE 10 MONEY 8 Measures of the U.S. Money Supply § The two main official measures of money in the United States are M1 and M2. M1 consists of currency and traveler’s checks and checking deposits owned by individuals and businesses. M2 consists of M1 plus time, saving deposits, money market mutual funds, and other deposits The distinction between M1 and M2 will usually not matter when we talk about “the money supply the money supply ” in this course.
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Lecture+10 - Economics 102 Lecture 10: Money Money What do...

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