ec3332-SemII01011Lec5 (1)

ec3332-SemII01011Lec5 (1) - Money and Banking I EC3332 Sem...

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Money and Banking I EC3332 Sem II, 2010-2011 Lec 6: Liquidity and Financial Intermediation
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Money as a Liquid Asset Why do people hold fiat money when many alternative assets offer greater rates of return – there is “rate of return dominance”? Because money is more liquid than alternative assets. It is useful in exchange. Lower transaction costs : it is less costly to exchange than other assets.
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Liquidity An asset is liquid if it is exchanged easily, quickly and at little cost. Other assets might not be transportable. the units might be to large for most transactions (indivisibility) it might be costly to determine their value (lack of recognizability) If counterfeiting is not a major problem, the value of fiat money is learned instantly.
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Old ₤ 20 note will go out of circulation 8 March 2010 announcement that old Elgar notes will go out of circulation from 30 June 2010. 150 million notes = ₤ 3 billion in circulation Primarily to deal with counterfeiting fears Old notes will eventually be sent to one of the official Government incinerators, where they will burned alongside damaged notes. A small amount of thermoelectric power is generated by these sites, which also burn illegal tobacco seized by HM Revenue & Customs at British ports.
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Old ₤ 20 note
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New “Adam Smith” 20 pound note
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SECURITY FEATURES - FRONT AND REAR 1. Paper quality - Banknotes are printed on special paper with raised lettering in some areas. Fake notes can sometimes feel limp or waxy 2. Print quality - Numbers, letters and colours are sharp and clear, whereas counterfeit notes may appear slightly blurred 3. Holographic strip - Pound symbol and figure 20 alternate when the note is tilted 4. Microlettering - Words printed below the portrait of the Queen are only visible with a magnifying glass 5. Metallic thread - Silver dashes on the back of the note become a continuous dark line when held up to the light 6. A see-through "register" shows a broken pound sign. The symbol becomes whole when held up to the light. 7. The watermark has been moved to a white panel to make it easier to find Other - Some unpublicised "covert features" are designed to further deter counterfeiters
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Recognizability of money "As a medium of exchange, money has to be continually handed about, and it will occasion great trouble if every person receiving currency has to scrutinize, weigh, and test it. If it requires any skill to discriminate good money from bad, poor ignorant people are sure to be imposed upon“ Stanley Jevons 1875.
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A model of illiquidity
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A Model of Illiquidity A model economy consistent with the following observations: Fiat money and capital are both valued.
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ec3332-SemII01011Lec5 (1) - Money and Banking I EC3332 Sem...

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