Lecture 15 -- Money Market

Lecture 15 -- Money Market - ECO 320L, Fall 2010, Professor...

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ECO 320L, Fall 2010, Professor Beatrix Paal updated 9/29/2010 12:21 PM Lecture 15: Introduction to the asset market, Money supply 1 Lecture 15 The asset market -- Introduction Today definition, functions, and measurement of money ( Chapter 7.1 ) money supply ( Chapter 7.1 and 14.1 ) Next time money demand ( Chapter 7.2 and 7.3 ) The asset market Where are we? We are building a general equilibrium model with three markets – labor (Ch. 3) b FE line – goods (Ch. 4) b IS curve – (financial) asset (Ch. 7) b LM curve Aggregation in the financial asset market What is a financial asset? It is a promise to deliver something in the future. That something can be a good, or even another financial asset there are many different kinds of financial assets instead of aggregating them into one category, we aggregate them into two categories: – monetary assets (money) – non-monetary assets The definition of monetary assets How to draw the line between monetary and non-monetary assets? “Money is what money does” money is a set of assets that fulfill the functions of money 2 PDF Created with deskPDF PDF Writer - Trial :: http://www.docudesk.com
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updated 9/29/2010 12:21 PM Lecture 15: Introduction to the asset market, Money supply 2 The functions of money Medium of exchange Money is a device for conducting transactions Without a medium of exchange, people would have to barter . Using a medium of exchange is more efficient than barter because – it reduces the time and effort cost of finding a trading partner – it allows greater specialization, as the cost of trading does not encourage self- sufficiency Unit of account Money is the basic unit for measuring economic value. The unit of account function is related to the medium of exchange function, because it makes sense to measure value in the same units that they are traded for. But in some situations the unit of account may be different from the medium of exchange This is especially common under conditions high and volatile inflation, when the money value of things can be very uncertain. It makes sense to use a more stable unit for expressing value, even if the local currency must be used in trade. 3 The functions of money (cont’d) Store of value All assets are a way of holding wealth, i.e. a store of value. There is always a time difference between receiving and spending money, so we hold money over a period of time, and therefore money is also an asset.
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Lecture 15 -- Money Market - ECO 320L, Fall 2010, Professor...

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