Chapter VII Asset Market

Chapter VII Asset Market - Chapter VII The Asset Market,...

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Chapter VII The Asset Market, Money, and Prices By asset market we mean the entire set of markets in which people buy and sell real and financial assets, including commodities, real estate, stocks and bonds and most important money. Money is important because assets are express in currency terms. The role of money in the economy: It is basic to studying issues related to the price level, such as inflation. It is believe that the amount of money in the economy affects real economic variables, and thus monetary policy could affect the growth of an economy. a. What is Money Money refers to specifically to assets that are widely used and accepted as payment. Example: Currency Checkable deposits Checks Money order… I. The Function of Money There are three functions a. Medium of Exchange This is used to eliminate the inefficiency of the batter system. Example: cow versus how many sheep or bushels of wheat. You would need to overcome in a battler system the following: someone willing to make the trade finding a market to trade find the right sheep to cow ratio that both participants are willing to athear Medium of exchange is an asset used in making transactions. This medium of exchange allows to increase productivity by allowing people to specialize in economic activity at which they are most skilled by reducing the amount of time trading. b. Unit of Account Unit of account is the basic unit for measuring economic value. 1
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This allows comparing items in terms of one standard currency. One exception is when there is a high level of inflation and prices are changed frequently. c. Store of Value Store of value means holding wealth over time. If you hold a dollar for one year it will be worth about one dollar one-year form now. If you hold a cow for one year and it dies, the value is now zero!!! As with unit of account, there is one exception. It is when high level of inflation and prices change frequently. II. Measuring Money: The Monetary Aggregate Money is measured in three ways: a. The M1 Monetary Aggregate. This is the narrowest definition of money. It consist of: Currency Traveler’s checks Demand Deposits Other checkable deposits (such as NOW and ATS) M1 is perhaps the closest counter part of the theoretical definition of money because all its components are actively used and widely accepted for making payments. b. The M2 Monetary Aggregate. It consist of: M1 Savings deposits, including MM Small-denomination time deposits MMMFs (non-institutional) c. The M3 Monetary Aggregate. It consist of: M1 and M2 Large denomination time deposits MMMF (institutional) Repurchasing agreements (an agreement by a bank to borrow from a non-bank by selling securities) Eurodollars held by domestic institutions 2
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Some of these assets can not be used as currency, but can easily be converted. Note: many of these are trade in the derivative market, which the book does not say.
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Chapter VII Asset Market - Chapter VII The Asset Market,...

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