11+Money+and+Inflation - 1 11-1 Money and Inflation 11-2...

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Unformatted text preview: 1 11-1 Money and Inflation 11-2 Agenda 1. What is Money? 2. The Federal Reserve System 3. The Quantity Theory of Money 4. Inflation and Interest Rates 5. The Cost of Inflation 11-3 What is Money? Money is a financial asset that serves three functions: 1. The unit of account. 2. A store of value. 3. The medium of exchange. 11-4 What is Money? The three functions of money: 1. The unit of account : money is how value in the economy is measured. Indicates the price of all goods and services in the economy. 2 11-5 What is Money? The three functions of money: 2. A store of value : money is a means of preserving purchasing power. Other assets can also serve as a store of value but not as the medium of exchange. Thus, money is the most liquid of all asset. 11-6 What is Money? The three functions of money: 3. The medium of exchange : money is the financial assets that can be used to finalize transactions. Generally accepted in payment for goods and services. Generally accepted in the repayment of debts. 11-7 What is Money? In the U.S., there are two measures of those financial assets that serve as money, called monetary aggregates. 1. The M1 money supply. 2. The M2 money supply. 11-8 What is Money? M1 (in 2009) consists of: 1. Currency $851.4 bn 2. Travelers checks $ 5.2 bn 3. Demand deposits $427.9 bn 4. Other checkable deposits $350.3 bn = Total M1 $1,634.8 bn 3 11-9 What is Money? Money Stock: M1 SA, Bil.$ 10 05 00 95 90 85 80 75 70 65 60 Source: Federal Reserve Board /Haver Analytics 2000 1600 1200 800 400 2000 1600 1200 800 400 11-10 What is Money? M2 (in 2009) consists of: 1. M1 $1,634.8 bn 2. Small time deposit $1,333.1 bn 3. Savings deposits $4,510.0 bn 4. Retail MMMFs $ 956.9 bn = Total M2 $8,434.8 bn 11-11 What is Money? Money Stock: M2 SA, Bil.$ 10 05 00 95 90 85 80 75 70 65 60 Source: Federal Reserve Board /Haver Analytics 10000 8000 6000 4000 2000 10000 8000 6000 4000 2000 11-12 What is Money? Money Stock: M1 % Change - Year to Year SA, Bil.$ Money Stock: M2 % Change - Year to Year SA, Bil.$ 10 05 00 95 90 85 80 75 70 65 60 Sources: Federal Reserve Board /Haver Analytics 20 15 10 5-5-10 20 15 10 5-5-10 4 11-13 What is Money? What money is not: 1. Money is NOT wealth. 2. Money is NOT income. 11-14 What is Money? Where does money come from? 1. Currency and coins are issued by the government. 2. Other money is issued by the financial system. 11-15 What is Money? Three groups affect the money supply: 1. The central bank conducts monetary policy. The U.S. central bank is the Federal Reserve System. 2. Depository institutions (i.e., banks) accept deposits and make loans....
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This note was uploaded on 10/18/2011 for the course ECON 100B taught by Professor Wood during the Fall '08 term at University of California, Berkeley.

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11+Money+and+Inflation - 1 11-1 Money and Inflation 11-2...

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