lec05_03 - ECON 4721H Money and Banking Lecture 05_03...

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Unformatted text preview: ECON 4721H Money and Banking Lecture 05_03 Satoshi Tanaka University of Minnesota Oct 28, 2011 Satoshi Tanaka ECON 4721H Money and Banking Lecture 05_03 Frontiers of Monetary Theory Search Theoretic Approach to Money Satoshi Tanaka ECON 4721H Money and Banking Lecture 05_03 Today's Questions Why do people use money? Why do people value pieces of paper that cannot be consumed? Satoshi Tanaka ECON 4721H Money and Banking Lecture 05_03 Roles of Money 1 Medium of exchange (today's main focus) 2 Store of value 3 Unit of account Satoshi Tanaka ECON 4721H Money and Banking Lecture 05_03 Simple Example: Medium of Exchange Assume three agents, each has di erent type of goods; A, B, C Assume no double coincidence of wants A wants B 's good, B wants C 's good, C wants A 's good Agent A Result: No trade in autarky Satoshi Tanaka ECON 4721H Money and Banking Lecture 05_03 Simple Example: Medium of Exchange 1 If I pass a piece of paper to agent A , and ... 2 If every agent believes that other will accept this piece of paper for the exchange of goods, then, the situation can be improved from the autarky. Agent A Satoshi Tanaka ECON 4721H Money and Banking Lecture 05_03 Setup In nitely many agents: Type 1 , type 2 , type 3 . Agents live forever. Proportion of each type is same. Type-1 agent only feels utility from good 1 . But, type-1 agent can produce only good 3 . Type 2 produces good 1, type 3 produces good 2. Agent can store goods, but only one unit. Satoshi Tanaka ECON 4721H Money and Banking Lecture 05_03 Preference If people consume the good they want, they get utility, u ( q ) ....
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lec05_03 - ECON 4721H Money and Banking Lecture 05_03...

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