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ECON20023 T1 2008 Lecture 11 - ECON20023 ECONOMICS FOR...

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Based on slides from Layton et al (2005) 1 ECON20023 ECONOMICS FOR BUSINESS T1 2008 LECTURE 11 Galina Ivanova, CQU
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2 Key concepts (Chapter 15) What is money? What is the demand for money? What is the money supply? What is the equilibrium interest rate? How is monetary policy implemented? What is the transmission mechanism? Other aspects of Australia’s financial system.
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3 Money – what is it? Exchange can take place using a trading system known as barter – direct exchange of one good for another. But barter requires double coincidence of wants. The use of money simplifies, and therefore facilitates, market transactions.
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4 Money has three functions Money is anything that serves as: A medium of exchange A unit of account A store of value. At different places and times, money has been metals, shells, stones and cigarettes. It doesn’t matter, just so long as it serves the three functions.
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5 The three functions Medium of exchange – the primary function of money to be widely accepted in exchange for goods and services. Unit of account – the function of money to provide a common measurement of the relative value of goods and services. Store of value – the ability of money to hold value over time.
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6 Other desirable properties Credit cards are not money – by themselves, they do not carry out the three functions of money. Money must also be: Scarce, but not too scarce Portable and divisible Uniform. Commodity money also has value in other uses, fiat money has no intrinsic value, but is acceptable by law.
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7 The demand for money Money itself provides no return, so people and business who hold cash or cheque account balances incur an opportunity cost (foregone interest or profits from the money held). There are three motives for holding money.
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8 Transactions demand for money The stock of money people hold to make everyday predictable expenses like making purchases or paying bills.
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9 Precautionary demand for money The stock of money people hold to pay for unpredictable expenses like unforeseen events.
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