Econ1102_ Week_7 - Week 7 Lectures 13 & 14 Money, Prices...

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Week 7 Lectures 13 & 14 Money, Prices and the Reserve Bank Reference: Bernanke, Olekalns and Frank - Chapter 9 Key Issues Money and its uses Private banks and money creation Money and prices Reserve Bank of Australia Cash rate and exchange settlement funds
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2 What is Money? Defined by its uses or its functions: Medium of exchange Unit of account Store of value
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3 Medium of Exchange Good or asset whose primary purpose is to purchase other goods. goods money goods Why not directly trade goods for goods? i.e. Barter Barter tends to be inefficient. If I want to buy a new computer I will have to find a supplier who would be willing to accept a series of economics lectures in exchange
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4 Double Coincidence of Wants For barter to occur: Person 1 wants to accept goods supplied by Person 2 Person 2 wants to accept goods supplied by Person 1 With a medium of exchange each person: Sells their goods for medium of exchange Uses medium of exchange to buy goods they want Significant reduction in costs of search
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5 Unit of Account Good that is used to compare the value of all other goods and services Standard to use medium of exchange as the unit of account
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6 Store of Value Good or asset that serves as a means of holding (or transferring) wealth over time. Many goods and assets can serve as a store of value (e.g. land, bonds, stocks) but do possess the medium of exchange or unit of account functions of money.
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7 Measuring Money In modern economies money is provided by: Government (currency – notes and coin) Banking system (deposits) Standard Measures of Money for Australia $ billion (end-June 2009) Currency 45.5 M1 249.8 M3 1,182.2 Broad Money 1,257.0
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8 Definitions of Money Measures Currency = notes and coin on issue (less what is held by RBA and banks) M1 = Currency + Current deposits at banks M3 = M1 + all other bank deposits of non-bank private sector Broad Money = M3 + borrowings from private sector by non-bank depository corporations (less what these non-banks hold with banks)
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9 Banks as Creators of Money Suppose central bank prints currency = $100m This is distributed to households and firms Rather than hold the currency, households and firms deposit the entire $100m into the private banks. Banking Systems’ Balance Sheet A s s e t s L i a b i l i t i e s Reserves = $100m Deposits = $100m
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10 100 Percent Reserve Banking This is a very simple banking system. Banks take deposits and place the currency in their vaults. These funds are called bank reserves . Like a safe-deposit facility. Banks could earn income by charging a fee for safeguarding and managing the currency. 100 percent reserve banking system.
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11 Bank Loans Banks decide that it is unnecessary to hold all of their deposits in the form of reserves. Some level of reserves is required to meet unexpected
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This note was uploaded on 09/16/2011 for the course ACCT 1501 taught by Professor Helen during the Three '09 term at University of New South Wales.

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Econ1102_ Week_7 - Week 7 Lectures 13 & 14 Money, Prices...

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