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EXAM 3 MATERIAL 04/01/08 “She Has a Lot of Money” o What does it mean? Barter Economy: No Money o People exchange goods and services directly o Requires a “ double coincidence of wants” o High transaction cost: the time and effort spent trying to find/exchange goods and services. What is Money? o The set of assets used as a “Medium of Exchange” o Enables people to exchange goods and services indirectly o “Means of payment” of “repayment of debts” 04/03/08 A “Good” Medium of Exchange o Verifiable at low Cost: Distinguishable real $ from counterfeit $ at low cost o Portable (carry it around conveniently) o Divisible (able to make change) o Durable (shouldn’t wear excessively) o Available in sufficient supply (no need for barter) o Have a stable purchasing power Three Functions of Money o Medium of Exchange o Unit of Account: Used to post prices and recording debts Cf) A unit of measurement: o For steak: pounds o For milk: gallons o Store of Value: Can be used to transfer purchasing power from present to future. Other items used as a store of value: Stocks, bonds, land, house, art, jewelry, etc. Liquidity: o The relative ease and speed (little loss in value) with which an asset can be converted into a medium of exchange. o Highly desirable. Money is the most liquid asset of all because it is the medium of exchange o Portfolio decisions: 10,000 100% checking account: liquid Mix 100% Stock: less liquid Where’s the money? o M1: $1366 X 10^9
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o Civil Pop 16+: 231 X 10^6 o M1/POP = $1366 x 10^9/231 x 10^6 = 5.913 x 10^3 = $5,913 per Adult The Advantages of Money: o Available in convenient denominations and easily portable o Can be exchanged for goods all times: completely liquid Money can be divided into 3 kinds o Commodity money: gold, silver o Bank Notes: Gold backed, gold standard o Fiat (Token) Money: Paper (&electronic) money with no intrinsic value Why would anyone accept worthless scraps of paper as money instead of something that has some value (e.g. gold, cigarette, or cattle)? o Decreed by the government as legal tender Must be accepted as payment for debts o Trust in the authorities who issue it That will not print paper money so fast that it loses its value. Printing has reached a sufficiently advanced stage that counterfeiting is extremely difficult o Currency Debasement: a problem throughout history The decrease in the value of money that occurs when its supply is increasing rapidly In 1997, Bulgaria, inflation rates was 1,268% Official Measures: Money in the US Economy: o M1 (transactions money): Currency held by public + Demand Deposits + Travelers checks + other checkable deposits Currency: the paper bills and coins held by the public Federal reserve notes (FRNs, “ferns”) o Monetary liabilities of the Fed Coins: the U.S. treasury’s monetary liabilities Deposits (Demand Deposits): balances in bank accounts that depositors can access on demand by writing a check Checks instructions to transfer money from one person’s
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