Lesson 4 Money demand and supply

Lesson 4 Money demand and supply - Money demand and supply...

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Unformatted text preview: Money demand and supply Money & Banking Juraj Draxler Revision: what is a bank? Basic definition: The definition of money Real wealth Stock of assets that can be used to produce a flow of goods and services If total wealth includes saving, then investment is possible How do we make transaction? How do we save (defer consumption)? > money Functions of money Unit of account Medium of exchange Store of wealth Standard of deferred payment What is money? (How do we create money?) Historically: one commodity became a standard (often precious metals, such as gold) Today: Legal tender (fiat money, enforced by law) Can also be created by many countries (eurozone) or unilaterally adopted (dollarization, euroization) Anything that is liquid What are the necessary conditions? Universal acceptance Ease of use and production (divisibility, portability and ease of production) Stability Problems of inflation & hyperinflation Problems of foreign exchange movements But the most important of all is: Acceptability No asset will be used as money unless everyone is willing to accept it as payment. Acceptability depends upon a number of conditions. One of these is stability of value. If people fear that the buying power of monetary assets is likely to fall before they can spend them, they will prefer to hold something else. We are familiar with: cigarettes being used as money in the Austro-German hyper-inflation of 19211922. US$ being preferred to national currencies in the 1970s in Latin America. Who creates money? The government (cbank) + commercial banks Money aggregates Given that most countries have a range of money measures, it has been found useful to group them into broad and narrow measures. A narrow measure of money contains a very limited range of assets, usually dominated by notes and coin but sometimes with limited bank deposits....
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This note was uploaded on 01/18/2012 for the course FIN 256 taught by Professor Draxler during the Spring '11 term at Anglo - americká vysoká škola.

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Lesson 4 Money demand and supply - Money demand and supply...

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