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
This
preview
has intentionally blurred sections.
Sign up to view the full version.
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

This is the end of the preview.
Sign up
to
access the rest of the document.
- Spring '08
- MyoungLee
- Macroeconomics, Inflation, Monetary Policy, Fed
-
Click to edit the document details