Topic 07 - Money

Topic 07 - Money - BUAD 350 Topic 07 – Money Keywords...

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Unformatted text preview: BUAD 350 Topic 07 – Money Keywords Money The Demand for Money Money Market Equilibrium Money Growth & Inflation Velocity of Money Quantity Theory of Money Hyperinflation Definition: Money What is money? Definition: Money Money refers to any asset which can be used to make payments (thus facilitate transactions) Money is what money does, it is: – A medium of exchange: Several economists believe that the only purpose of money is to make transactions and avoid costly and inefficient systems such as bartering – A store of value: It allows us to transfer purchasing power from the present to the future – A unit of account: It is a yardstick with which we measure economic transactions Definition: Money (contd.) Historically, economies had commodity money (e.g. gold standard). Now economies have fiat money (it has value by government decree) The government has a monopoly over the supply of money. The authority to control money supply is left to the central bank (independent institution): – In the US: Federal Reserve Bank (the Fed) – In Europe: European Central Bank, Bank of England – In Japan: Bank of Japan Definition: Money (contd.) Currency is not the only form of money: – Checking accounts, travelers’ checks, etc. Since money is used for transactions, any instrument that is liquid can be counted as part of money There are several measures of money, so one uses a particular measure depending on the application at hand Definition: Money (contd.) Measures of money are called monetary aggregates : – The M1 monetary aggregate: (closest to our theoretical definition) Currency + Travelers’ checks Demand deposits (paying no interest) Other checkable deposits (paying interests) – The M2 monetary aggregate: M2 = M1 + other assets (not as moneylike) Saving deposits, including Money Market Deposit Accounts (MMDA) Small time deposits Non-institutional Money Market Mutual Fund (MMMF) balances Data: U.S. Money Supply 2003 Aug-2009 Billions of U.S. Dollars % of GDP Billions of U.S. Dollars % of GDP Currency 642.8 6.1% 857.7 6.1% M1 1224.4 11.6% 1649.8 11.7% M2 6004.6 56.7% 8297.9 58.6% Note: GDP(2009:Q4) = $14,461 B Data: U.S. Money Supply The St. Louis Fed issues weekly, monthly, and quarterly bulletins on: – Financial conditions US Financial Data (Weekly) Monetary Trends (Monthly) – Economic conditions National Economic Trends (Monthly) – International conditions International Economic Trends (Quarterly, also a more comprehensive annual edition) The Demand for Money Question: What is the demand for money? The demand for money is the quantity of monetary assets (i.e. money) that people in the economy want to hold in their portfolio Question: How do people decide on how much money to hold? The Demand for Money (contd.) Question: How do people decide on how much money to hold?...
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This note was uploaded on 02/15/2011 for the course BUAD 350 at USC.

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Topic 07 - Money - BUAD 350 Topic 07 – Money Keywords...

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