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Mankiw - Chapter_29 - Chapter 29 The Monetary System 29.1...

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Chapter 29 The Monetary System 29.1 Introduction z In this chapter we will learn: The role of money in the economy; what money is; the various forms that money takes; how the banking system helps create money; how the government controls the quantity of money in circulation 29.2 The meaning of money z Money in economics: the set of assets in the economy that people regularly use to buy goods and services from other people. According to economist’s definition, money includes only few types of wealth that are regularly accepted by sellers in exchange for goods and services. 29.2.1 The functions of money z Three functions of money: 1. A medium of exchange : money is an item that buyers give to sellers when purchase goods and services in a market transaction. 2. A unit of account : money is a standard that people use to post prices and record debts. 3. A store of value : money is an item that people can use to transfer purchasing power from the present to the future. z Wealth : the total of all stores of value, including both money and nonmonetary assets. z Liquidity : the ease with which an asset can be converted into the economy’s medium of exchange. Money is regarded as the most liquid asset available.; Most stocks and bonds are relatively liquid assets because they can be sold (converted to money) easily with small cost. z The link between the price level and the value of money: When prices rise, the
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value of money falls (i.e. low purchasing power of the money) This link is important for understanding how money affects the economy. 29.2.2 The kinds of money z Commodity money : Money that takes the form of a commodity with intrinsic value. (e.g.: gold, silver) When an economy uses gold as money (or uses paper money that is convertible into gold on demand), it is said to be operating under a gold standard . z Fiat money : Money without intrinsic value that is used as money because of government decree. (e.g.: paper dollars…it reads “This note is legal tender for all debts, public and private.”) 29.2.3 Money in the U.S. economy z Money stock : the quantity of money circulating in the economy Two measures of the money stock : M1 and M2 M1 : z Currency: the paper bills and coins in the hands in the public z
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