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Section+3 - Section 3 Money Banking Money The stock of...

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Section 3 Money & Banking
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Money The stock of assets that can be readily used to make transactions Three Functions: 1. Store of Value – Transfer purchasing power from present to future 2. Unit of account – Recording of prices and debt 3. Medium of Exchange – Substitutes “Double Coincidence of Wants” in Barter economy
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Types of Money Commodity Money – some commodity with intrinsic value E.g. Gold, Silver, Stone Wheels Fiat Money – No intrinsic value – established by government decree (fiat)
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Real Economy Definition : The part of the economy that is concerned with actually producing goods and services, as opposed to the part of the economy that is concerned with buying and selling on the financial markets. (Source: Longman Business English Dictionary ) Prices are relative
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The Quantity Theory of Money M × V = P × Y M × V = The total amount of money that circulated in the economy within the year: M – the total amount of money in circulation V – The velocity of money = number of times that a single bill changes hands P × Y = The nominal ($) value of all goods sold in the economy in one year: P – the price level in the economy Y - the real (physical) output of the economy
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Money Demand The Demand for money in the economy: (M/P) d = kY We assume that the velocity of money is constant k
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Determination of Prices Supply of Gold Demand for Gold P
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Output Increases Fixed supply of gold Higher demand for gold The value of each piece of gold increase The price of other goods in terms of gold decreases DEFLATION Borrowers owe fixed number of pieces of gold owe more (losers) Creditors gain Supply of Gold Demand for Gold P P’
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Supply of Money Increases (e.g.
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