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Unformatted text preview: 10. MONEY, INFLATION & THE MONETARY SYSTEM Intro to Macro (ECON 0110) Torsten Jochem 10. Money, Inflation & Mon. System b Content b 1. Money s Basics, Types of Money, Gold Standard, Measuring the Amount of Money, The Quantity Theory of Money 2 b 2. Inflation s Basics, Deflation, How to Measure Inflation; Nominal vs. Real GDP; Causes of Inflation & positive/negative Inflation effects b 3. The Monetary System s The Federal Reserve System, Traditional and recent innovative Monetary Policy Tools b 1. Money b What is Money? 3 10. Money, Inflation & Mon. System b 1. Money b What is Money? s Any token that is used by people as an intermediary in the exchange of goods. 4 10. Money, Inflation & Mon. System b What if there was no money? b 1. Money b What is Money? s Any token that is used by people as an intermediary in the exchange of goods. 5 10. Money, Inflation & Mon. System b What if there was no money? s Barter economy s The problems of double coincidence of wants and indivisibility imposes very large trade transaction costs. s Gift economy s Giving a good or service without an explicit contract for return but the implicit assumption that something will be returned in the future. b 1. Money b Some economists 1 argue that no civilization is possible without some form of money as any larger civilization requires some division of labor & specialization. 6 10. Money, Inflation & Mon. System s How to have urbanization (as town folks typically need to be supplied with food from the country side)? s How to have any form of price system (so that you can compare the prices of goods to one another)? s How to institute division of labor & production chains? s How to denominate loans & debt? 1 Perhaps, most famously, libertarian economist Murray Rothbard. b 1. Money b In fact, no large society is known to have had no money: s Earliest known civilization: Sumer of Mesopotamia ca 5500- 2000 BC used barley as commodity money. 7 10. Money, Inflation & Mon. System s Earliest money in Japan: arrow heads, rice grains. s Swaziland: red ochre s Europe: Salt, Silver & Gold s India & China: copper, nickel, aluminum, silver s Indian Ocean Islands, East Africa, China, North America Pacific coast : Cowry Shells s POW camps: tobacco b 1. Money b Money develops automatically: s Farmer Bill has butter and needs shoes. Shoemaker Joe does not need butter but accepts candles as he knows he will 8 10. Money, Inflation & Mon. System need them anyways and they wont go bad. (Also other people are willing to accept candles for these reasons.) So Bill exchanges his butter first for candles before seeing Joe. s Candles trump butter because of their durability, usability, divisibility, transportability; candles intrinsically have more marketability than butter!...
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