S10 MyCh07 C(2)

S10 MyCh07 C(2) - Ch. 7 Money and the Asset Market...

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1 Ch. 7 Money and the Asset Market (Continued) 
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 Storage of value and  Medium of exchange I As medium of exchange, money has  few  substitutes: as  storage of value, money has  many  substitutes, including  bonds, real estates, or object of art (how much of what is  portfolio balance) For paper assets (which is intrinsically worthless)      If  it cannot serve as storage of value,           then it cannot be acceptable as medium of exchange;      If  it cannot be acceptable as medium of exchange,          then it cannot serve as storage of value. Here the expectations about the society (acceptable medium)  2
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 Storage of value and  Medium of exchange II Monetary economies exist because of common faith:        about the future         based on HOPE If everyone perfectly believes in the infallible predictive power  of       the ancient Mayans, and       the ancient Mayans believed there need be nothing in a  calendar              equivalent to 2013! Then no money is acceptable in 2012. 3
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4 So what qualifies as money? what is widely acceptable for payments Currency, certainly Checking deposits against which one can issue  checks, etc. These are components of M1 By including other highly ‘liquid’ assets like saving  accts               one obtains M2   [ Liquidity means how soon one can get money from  it ]
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5 Table 7.1  U.S. Monetary Aggregates (May 2006)
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6 Measuring money The M2 monetary aggregate (beside M1) Savings deposits include passbook savings  accounts Time deposits bear interest and have a fixed term  (substantial penalty for early withdrawal) MMMFs invest in very short-term securities and  allow check writing against it MMDAs are offered by banks as a competitor to  MMMFs
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7 Where have all the dollars gone? In 2006, U.S. currency averaged about $2500 per person, but surveys show people only hold about $100 Some is held by businesses and the underground economy, but most is held abroad Foreigners hold dollars because of inflation in their local currency and political instability
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8 Where have all the dollars gone? Since currency is 1/2 of M1 and
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S10 MyCh07 C(2) - Ch. 7 Money and the Asset Market...

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