Monetary theory notes - M arch 29, 2011 Monetary theory...

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March 29, 2011 Monetary theory Money should have only 1 meaning: CASH/ money substitute (Check) In common speech the word money is used in 3 senses: cash, income and wealth Cash-used in terms Income-used in terms of earning Wealth- used in terms of worth; accumulated savings (bank deposits, stocks, bonds) Functions of money 1 Medium of exchange 2 Unit of account 3 Store of value Standard of value (unit of account) Money is the common instrument of exchange Money substitutes: checks, electronic transfers Credit cards are not included in the definition of money because it is a borrowing instrument; it borrows the purchasing power of the credit card issuer Credit can be defined as a liability or an instrument of debt. Also a medium to make a purchase without income. Income can be converted into cash, income=cash M1= currency in circulation +demand deposits +travelers checks H=high power money= to reserves +currency in circulation April 5, 2011 Chapter 2 Under the barter system money is not used.
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Problems with barter: coincidence of wants: a situation in which the good or services that one trader desires to obtain is the same as that which another desires to give up and an item that the second trader wishes to acquire is the same as that which the first trader desires to surrender you have to find somebody who wants to trade the item that you want to get AND who also wants the item that you have that you want to trade With barter there will be less specialization because of the difficulty of overcoming the coincidence of wants. If you can't find someone to trade with, you will have to produce it yourself Less specialization means less output and MORE SCARCITY Money facilitates trade and promotes specialization. Money differs from other assets in that it serves as a medium of exchange Functions of Money 1. Medium of exchange a. Money can be used for buying and selling goods and services b. without money we have the problems of barter and the coincidence of wants c. money allows for greater specialization and trade and productive efficiency 2. Unit of account: Prices are quoted in dollars and cents. 3. Store of value: money allows us to transfer purchasing power from present to future. it is the most liquid (spendable) of all assets, a convenient way to store wealth. Fiat money: money authorized by the central bank is defined as the nation’s money and does not have to be exchanged for any commodity. An example of commodity money is Marlboro cigarettes in the late 1980s
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In the US Federal Reserve Notes are the definitive money One problem the barter system does not have is the problem of sellers not having anyone who would be able to but their product Credit Cards are not electronic funds transfer Specialization increases economic efficiency: individuals produce things they are good at producing. Because of such specialization, people create surpluses and need ways to trade the things they produce. The three possible allocations rely on barter, government
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Monetary theory notes - M arch 29, 2011 Monetary theory...

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