18_Inflation - Lecture 18 Money What is money? Anything...

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Lecture 18 Money What is money? Anything people will accept in place of the goods they seek to obtain. Trust is critical. Examples from history: salt in Egypt; rice in Japan; dried fish in Iceland; cotton cloth in Africa; cigarettes in Romania in the 1970s; liquor in Germany after World War II; QQ coin in China; rocks such as gold and silver
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Roles of Money Account keeping Store of Value Medium of Exchange More efficient than barter If people do not trust official money, they use other things
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Money Creation Governments create money Role of central banks Independence from politics important Many views on how the banks should manage money creation — fixed rules versus flexibility
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Inflation What is inflation? It is a general rise in prices— not an increase in one price, such as higher price for wheat one year due to bad crops causing a short supply. Primarily it means more money in the hands of people who are trying to buy the same quantity of goods in an economy.
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Inflation Is Not an Increase in One Price If the price of one good rises, it does not cause inflation. It is a change in relative prices.
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18_Inflation - Lecture 18 Money What is money? Anything...

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