Macro.Week8.2008 - II - 8/1 Continue the topic we began...

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II - 8/1 Continue the topic we began last week. We need to understand the role of money in the economy, and how it feeds into our macro model via the interest rate. Money is what people use “money” for transactions. Money is convenient. Without money, the only way we can get stuff is to - barter This is wildly inconvenient because it requires the double coincidence of wants, and so EVERY SOCIETY INVENTS MONEY (eg. W.W.II P.O.W. camps used cigarettes!) to work, “money” must be - recognizable - portable - divisible - durable - hard to counterfeit this function of money is as “medium of exchange” money also functions as a store of value, and a unit of account history of money is interesting – see the book
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II - 8/2 Money is more than just the paper in your wallet: it is whatever you use to buy stuff For convenience in this course, we will call money: all cash + all balances in chequing accounts chequing accounts are also called “demand deposits” This definition of money is what is called “M1” There is also “M2” (includes savings accounts) and “M2+” (includes deposits in trust companies, credit unions, caisses populaires, plus money market accounts) Key is that money is what people use for transactions People hold money for a lot of reasons, but the main one is for buying stuff - we call this the “transactions motive” So far all this makes a certain sense, but keep in mind that we are using the word “money” in a different way than it is used in society.
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II - 8/3 Beatles song #1 about money: Money don't get everything it's true. What it don't get I can't use. So gimme money, that's what I want, A little money, that's what I want That's what I want, ye-ye-yeh, that's what I want. Beatles song #2 about money: I'll buy you a diamond ring my friend if it makes you feel alright I'll get you anything my friend if it makes you feel alright 'Cause I don't care too much for money, money can't buy me love I'll give you all I got to give if you say you love me too I may not have a lot to give but what I got I'll give to you I don't care too much for money, money can't buy me love Can't buy me love, everybody tells me so Can't buy me love, no no no, no Neither of these is “money” In both cases, the word “money” is being used to indicate “wealth” Someone with a lot of money is “wealthy” For economists, money is a way to store value so that it can easily be used to buy stuff (so money is a particular type of asset)
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II - 8/4 Money is what you use to buy stuff The term for “easily used to buy stuff” is LIQUID In fact, money is the prototypical “LIQUID ASSET” Liquidity means “like money” or “easily turned into money” There are other ways to store value (other assets) that are not so liquid. eg.
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Macro.Week8.2008 - II - 8/1 Continue the topic we began...

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