MIT14_02F09_lec10

MIT14_02F09_lec10 - TOPIC 5 Money 1 Outline • What is...

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Unformatted text preview: TOPIC 5 Money 1 Outline • What is Money? • What does affect the supply of Money ? • What does affect the demand of Money ? – Asset Portfolio Decision – Quantitative Theory of Money • Equilibrium in the Money Market 2 Money • “Money” is the economic term for assets that are widely used and accepted as Money is the economic term for assets that are widely used and accepted as payment. • The forms of money have been very different: from shells to gold to cigarettes! (Eastern Europe and German Prisoners Of the War camps) • Most prices are measured in units of money → understanding the role of money is portant to understand inflation important to understand inflation • Many economists believe that money has also impact on real variables (we will talk about that!) 3 3 Functions of Money 1. Medium of exchange : Money permits to trade at less cost in time and effort! • Barter is inefficient because is difficult and time-consuming to find the trading partner. • Other benefit: allows specialization (and rises productivity) it f t M i th b i it f i i l 2. Unit of account : Money is the basic unit for measuring economic value • Given that goods and services are mostly exchanged for money, it is natural to express economic value in terms of money p y • Caveat: In countries with volatile inflation, money is a poor unit of account because prices must be changed frequently. More stable units of account used (dollars or gold), even if transactions use local currency. 3. Store of Value : money is a way of storing wealth. • ther types of assets may pay higher returns BUT it is a medium of 4 Other types of assets may pay higher returns, BUT it is a medium of exchange!! Measures of Money • The distinction between monetary and non-monetary assets is controversial. • Example: MMMFs (money market mutual funds) are organizations that sell shares to the public and invest in short-term gov and corporate debt. Low return and allow for checks (with fee)…Are they Money? • There are two main official measures of money stock, called monetary aggregates : 1. M1 : the most narrow definition, includes mainly currencies and balances held in checking accounts. 2. M2 : includes everything in M1 plus less “moneylike” components: saving eposits, small time deposits, MMMFa, MMDAs (money market deposit 5 deposits, small time deposits, MMMFa, MMDAs (money market deposit accounts). Money Supply • Money supply is the amount of money available in an economy • In modern economies, money supply is affected by: 1. The Central Bank (the Federal Reserve System in the United States) is the government institution responsible for monetary policies . epositary Institutions anks) are privately owned banks and thrift 2. Depositary Institutions...
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This note was uploaded on 11/18/2011 for the course ECON 14.02 taught by Professor Veronicaguerrieri during the Fall '09 term at MIT.

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MIT14_02F09_lec10 - TOPIC 5 Money 1 Outline • What is...

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