mon_econ_week1 - 1 The University of Sydney Faculty of...

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1 The University of Sydney Faculty of Economics and Business MONETARY ECONOMICS {6 credit points} ECOS3010 — 2009: S EMESTER 2 Tony Aspromourgos WEEK I : WHAT IS MONEY?—KEY ISSUES 1.1 attributes and functions of money 1.2 money and incompleteness of markets 1.3 money and uncertainty 1.4 defining money: ‘liquidity’ as a matter of degree READING: There is no reading for this week. 1.1 ATTRIBUTES AND FUNCTIONS OF MONEY There are commonly four required or desirable attributes suggested, for a thing – commodity or asset – to serve as money: homogeneity [for information and unit of account reasons]; ‘infinite’ divisibility [for unit of account reasons]; durability [for store of value reasons]; portability [for carrying costs reasons]. Gold and silver in the West emerged as the commodities with these characteristics, serving as money (likewise, subsequently, fiat currency and bank deposits). The vital evolution of money in modern times is from the Gold Standard, to gold-backed paper (paper currency ‘as good as gold’), to pure fiat paper currencies since the 1970s. There are four functions commonly offered for money: unit of account; store of [ liquid! ] value; medium of exchange (versus ‘means of payment’—the latter is narrower, and the genuine money notion); standard of deferred payment. The fourth is really derivative from the first and the third: unit of account and/or means of payment in relation to intertemporal contracts. The store-of-value function which is peculiar to ‘money’ turns upon its liquidity which in turn, is derivative from the means-of-payment function. Hence the conclusion that the means-of-payment function is the vital defining characteristic of money (see 1.4 below). 1.2
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mon_econ_week1 - 1 The University of Sydney Faculty of...

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