MACRO FINAL NOTES - EXAM 3 MATERIAL"She Has a Lot of Money...

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

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