Econ+102+lecture+16%2C+3-8-12+-+Money+and+banking copy

Econ+102+lecture+16%2C+3-8-12+-+Money+and+banking copy -...

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Lecture 16: Ch. 14 - Money and Banking Econ 102, Winter 2012 3/8/2012 1 Required reading : Ch. 14: pp. 381-397
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Outline 1. Intro to monetary policy 2. An American history of money 3. Measuring money 4. Banks and money creation 3/8/2012 2
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Intro to Monetary Policy Monetary policy is the manipulation of the money supply in order to achieve macroeconomic stability Just as changing G, TR & T can shift the AD curve (as seen in Ch. 13), so can changing the money supply (M) To understand the manipulation of M, we need to understand first the basic functions of money, the banking system, and the Federal Reserve Bank The Federal Reserve (“The Fed”) is the central bank of the U.S.: the institution that regulates the banking system and controls the monetary base 3/8/2012 3
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Intro to Monetary Policy Money is any asset that can be easily used to purchase goods and services. It is (by definition) the most liquid of all assets Liquidity : the ability of an asset to be turned into cash without any (or much) loss in value The money supply (the total value of all assets considered money) has two major components: 1. Currency in circulation : cash held by the public 2. Checkable bank deposits : bank accounts agaist which people can write checks 3/8/2012 4
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Intro to Monetary Policy For a thing to be called “money”, it must have three major characteristics. It must serve as a: 1. Medium of exchange People use it to enact transactions – you can trade it for goods and services 2. Store of value Can use it to move purchasing power through time – you can save and then spend later without losing value (or, given inflation, without losing much value) 3. Unit of account 3/8/2012 5
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An American history of money 3/8/2012 6 A number of pre-Columbian nations were based on barter : trading good-for-good The Incas in particular never had money Barter requires a double coincidence of wants : can be difficult or inefficient Most pre-Columbian nations used commodity money : trading some good of intrinsic value Mayas and Aztecs used gold and cocoa beans Further north, wampum (shells) and furs were most commonly used For most of US’s history, we had commodity-backed
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An American history of money 3/8/2012 7 Commodity-backed money : A medium of exchange with no intrinsic value, but with a promise that it can be converted to a good with intrinsic value upon request US commodity-backed money From 1775-1900, had a bi-metallic backing: 15:1 or 16:1 ratios of silver to gold. Two attempts to start national banks to issue national currency. Both failed (politically) 1833 – 1861: period of “free banking” – local banks could issue notes in support of the gold the bank held. Abraham Lincoln ordered the first US pure fiat money in 1861, called the “greenback”
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An American history of money 3/8/2012 8 Fiat money : Money whose value is not associated with any tangible good. Fiat = “by declaration”.
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Econ+102+lecture+16%2C+3-8-12+-+Money+and+banking copy -...

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