Introduction to Financial Markets

Introduction to Financial Markets - Advantages of Fiat...

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Introduction to Financial Markets From Last Time You do need to memorize the items that make up M1, M2, and M3. The M probably refers to Monetary Aggregate. Don't worry about L. Full-bodied money has a value in another use equal to its value as money, e.g. if there was 1 cent worth of copper in a penny, it would be full-bodied money. Gresham's Law says that if there are two types of money (say, those copper pennies and zinc pennies) in circulation, the one with the smaller value in another use (the zinc pennies) will stay in circulation as money while the good money will be hoarded. Pure fiat money is costless to produce. Its only value comes from what it can be used to purchase. It has no value as anything other than money. The Susan B. Anthony dollar was the closest thing we've had to money that was costless to produce and keep in circulation.
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Unformatted text preview: Advantages of Fiat Money The fundamental defect of full-bodied money, from society's point of view, is that it requires the use of real resources to add to the stock of money. People must work hard to dig something out of the ground in one place, say to dig gold out of the ground in south Africa, in order to rebury it in Fort Knox. Seignorage is the profits earned by producing money. With full-bodied money, there is no seignorage. But, fiat money enables the government to acquire resources and provide society with services equal to the real value of the money created. We can have money without any sacrifice. By switching from full-bodied money like gold coins to fiat paper money, the government can now hire miners and mining equipment to build us a subway system rather than mine gold....
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This note was uploaded on 11/22/2011 for the course FIN FIN1100 taught by Professor Bradrifkin during the Fall '09 term at Broward College.

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