Chapter5_Money_2009 - Disclaimer: These notes were prepared...

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Unformatted text preview: Disclaimer: These notes were prepared based on lectures of Prof Sala-i-Martin’s 2008 Fall Course of Intermediate Macro-W3213. Contents of these notes might not match completely with the current teachings in class. An updated version would be available later in the semester. 5.1 Money: Price Levels, Money Demand and Money Supply Money Money is a medium of exchange. It is also a unit of account. It is one of those convenient things that ensure all prices are quoted in the same unit. When you go to the store you see the price ALWAYS expressed in DOLLARS; never in pencils or lee press-on nails. That is why we say that money is a unit of account. In principle, there is no reason why money, which is the medium of exchange, is also the unit of account. We could express all prices in terms of pencils. This would be feasible although it would be slightly inconvenient because we would need to know AT ALL TIMES how much is a pencil worth, given that we would quote the price in units of pencils, but we would still have to pay in dollars. This may be the reason why the unit account, money, tends to be the same “good” as the medium of exchange. Money as a Medium of Exchange: Simple societies (with few produced goods) can deal with trade through barter. Barter becomes VERY complicated as societies become complex and the number of goods in the economy increases dramatically. The reason is that in order to barter with someone, NOT ONLY you need to find a person that HAS WHAT YOU WANT but that WANTS WHAT YOU HAVE. To visualize the problem, let us consider the following situation: A (wants goods from C) B C (wants goods from A) (wants goods from B) Fig 5.1 Suppose, person A likes Lee press-on nails but produces Richard Simmons Sweat-into-the oldies videos, person B Likes Sweat into-the-oldies videos but produces The Abdomenizer, and person C likes the Abdomenizer but produces Lee press-on nails. They can all meet together and barter but for that they need to be in the same place at the same time. ALTERNATIVELY, they can introduce MONEY which is pieces of paper with somebody’s face on it. We do not really like money, we like what we can purchase with it. We will call the stock of money outstanding in the economy at time t as M t . 5.2 A Brief History of Money (A) COMMODITY MONEY is where gold and other valuable stuff are used as money. Other not so obvious things like feathers, funny looking stones, fish bones etc have served the purpose of money. When using gold as the medium of exchange, for every transaction we would have to weigh the gold and check its purity. Instead, we could have the government (or the King) STAMP pieces of gold of same size and quality. In this way the currency becomes Gold COINS. This GOLD-money has intrinsic VALUE....
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This note was uploaded on 11/10/2011 for the course ECON 3100 taught by Professor Sala-i-martin during the Spring '11 term at Columbia.

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Chapter5_Money_2009 - Disclaimer: These notes were prepared...

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