Money and Prices in the Long Run

Money and Prices in the Long Run - Money and Prices in the...

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Money and Prices in the Long Run Lectures Supratim Das Gupta
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Key Questions to address: What is money? What are the functions of money? The types of money? What is the Federal Reserve? What role do banks play in the monetary system? How do banks “create money”? How does the Federal Reserve control the money supply?
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What is Money? Money is the set of assets in the economy that people regularly use to buy goods and services from each other. Money consists of both currency and demand deposits Without money, trade would require barter , the exchange of one good or service for another Every transaction would require a double coincidence of wants
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Three functions of money Medium of exchange : An item buyers give to sellers when they want to purchase goods and services Unit of account : the yardstick people use to post prices and record debts Store of value : an item people can use to transfer purchasing power from the present to the future Liquidity is the ease with which an asset can be converted into the economy’s medium of exchange Assets such as stocks and bonds can also be used as stores of value but are less liquid than money
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THE MONETARY SYSTEM 5 The 2 Kinds of Money Commodity money : takes the form of a commodity with intrinsic value Examples: gold coins, cigarettes in POW camps Fiat money : money without intrinsic value, used as money because of govt decree; worthless except as money Example: the U.S. dollar 0
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THE MONETARY SYSTEM 6 The Money Supply The money supply (or money stock ): the quantity of money available in the economy What assets should be considered part of the money supply? Two candidates: Currency : the paper bills and coins in the hands of the (non-bank) public Demand deposits : balances in bank accounts that depositors can access on demand by writing a check 0
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7 Measures of the U.S. Money Supply M1 : currency, demand deposits, traveler’s checks, and other checkable deposits. M1 = $1.4 trillion (June 2008) M2 : everything in M1 plus savings deposits, small time deposits, money market mutual funds, and a few minor categories. M2 = $7.7 trillion (June 2008) Refer to Fig 1 of the book The distinction between M1 and M2 The distinction between M1 and M2 will usually not matter when we talk about will usually not matter when we talk about “the money supply” in this course. “the money supply” in this course.
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This note was uploaded on 06/03/2011 for the course ECON 224 taught by Professor Ozturk during the Fall '09 term at South Carolina.

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Money and Prices in the Long Run - Money and Prices in the...

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