{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

Lecture1_free - Lecture 1 Foundations of Money Readings...

Info icon This preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
Lecture 1 Foundations of Money Readings: Handa (2009)-Chapter 1 Bain and Howells (2009)-Chapter 1 Section 1.1 Defining the Concept of Money What is money? I Unit of Account : Money is one simpler way of measuring the value of goods and services. The use of money makes trade simpler, because we only need to know prices in terms of money, rather than relative prices of all goods. II Medium of Exchange : Money promotes economic efficiency by minimizing the time spend exchanging goods and services. This reduces the need for what Jevons called the Double Coincidence of Wants. The medium of exchange is very important to many theories in justifying the efficiency of monetary systems over barter systems. III Store of Value : Money can be used to store purchasing power from the time received until the time that it is spent. This allows for separation of the decision to buy from the decision to sell. This feature of money also reduces the need for the double coincidence of wants. IV Standard of Deferred Payments : Money can be used as a standard for the quantity of debt. Section 1.2 Do We Need Money? What is the current orthodoxy? And what are the alternatives? 1
Image of page 1

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Money reduces uncertainty. In a barter economy, decisions are made on incomplete information, whereas monetary economies allow for more efficient use of resources Money reduces transactions and information costs. It can be seen that money makes the economy more efficient since as a unit of account, money allows people to spend more time producing goods and services. The number of prices that need to be calculated in a multi-good economy is reduced exponentially. In an economy with J goods, if agents are bartering there are J 2 - J prices assuming you don’t want to trade one good for itself. However, if you are in a monetary economy, there are only J prices. If J = 10, the difference in prices is 90 versus 10. As J grows larger, the difference in the number of prices grows exponentially (Champ and Freeman, 2001, p. 36). Why did money develop as it did? Why does it have to change hands? Goodhart (1988) stresses the informational problem of trustworthiness and/or creditworthiness of the counter-party, leading money to change hands. The Cash-in-Advance constraint , or Liquidity Constraint means that credit is not acceptable for a trade to take place.
Image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern