Lecture 21 Notes

Lecture 21 Notes - ECN 211 Macroeconomic Principles L21:...

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10/30/09 1 ECN 211 Macroeconomic Principles L21: Money and Banks
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10/30/09 2 What is Money? Money … anything that is generally acceptable to sellers in exchange for goods and services Examples – $ – Cigarettes in WW2 POW camps
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10/30/09 3 Wealth and Money • People hold their wealth in many different forms: – Property – Equities/Stocks – Cash – Bank Accounts – Government Bonds • Why? – A liquid/return trade-off – Note: we are going to ignore the risk/return tradeoff
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10/30/09 4 Liquidity Liquid Asset … an asset that can easily be exchanged for goods and services Higher liquidity implies lower returns • Money is the most liquid asset – Therefore has the lowest (zero return).
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10/30/09 5 Functions of Money ‘Money is a matter of four functions – a medium, a measure, a standard and a store’
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10/30/09 6 • Medium of exchange – It lowers transactions costs – Do not need the “double coincidence of wants” • Measure of value – All goods and services are priced in common monetary units – Allows us to compare relative prices easily. – Only need one set of prices.
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10/30/09 7 • Store of Value – Money retains its value through time usually – Need to control inflation. • Standard of deferred payment – Money may be used to make future payments. – Debt is written in dollar amounts.
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Other properties of money • Portable – Has to be portable to be an effective medium of exchange. • Divisible
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Lecture 21 Notes - ECN 211 Macroeconomic Principles L21:...

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