Money%20and%20Banking%20-%20HO%202

Money%20and%20Banking%20-%20HO%202 - Money Q: What is...

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Unformatted text preview: Money Q: What is money? Wow! Whoever lives there must have a LOT of money! What they have is a lot of WEALTH! They may not be holding much money. Money is one of many assets we might hold our wealth in. It is unique in that money, unlike other assets, serves as a:- Medium of Exchange- Unit of Account Money serves as a Store of Value , an asset we can hold our wealth in. But we are more likely to hold most of our wealth in other, non- money, assets..like this house..stocks and bonds....etc.! Medium of Exchange We will accept money for goods and services..and goods and services for money. This is the medium of exchange function of money. Q: What would the world be like with no medium of exchange, without money? Id love to have some butter. Id love to have some bread. Double Coincidence of Wants. BARTER: Q: Would this class Econ 252 exist if we had no medium of exchange? Without a medium of exchange, the incentive to specialize in production of goods and services for which we have a comparative advantage almost disappearsas does trade. The wealth of nations, and each and every one of us, would be significantly reduced as a result. Unit of Account Prices are quoted in monetary units. This is moneys role as unit of account. From money prices we can readily determine relative prices, what we give up in other goods when we buy a good or service: $1.50/Slice of Pizza $3.00/Glass of Beer Beer Pizza P $3.00/Glass of Beer Slices of Pizza = = 2 P $1.50/Slice of Pizza Glass of Beer If all prices are quoted in the same unit of account, the cost to us of determining relative prices is significantly reducedand we make better trades as a resultmaking us better off! Store of Value and Liquidity Money is one of many assets we can hold our wealth in. It is one of many stores of value. Fine Art Real Estate Stocks & Bonds Money Liquidity Liquidity is the ease with which an asset may be converted into the medium of exchange, so that we can then buy goods and services. We hold only small fractions of our wealth in money, the most liquid asset. Commodity versus Fiat Money It was once true that most money in circulation was commodity money , which has intrinsic value aside from its use as a medium of exchange: GOLD! Dollar Bill VS This dollar bill has essentially ZERO intrinsic value. It is only of value to us as a medium of exchange. The dollar is a fiat money . SOCIAL CONTRACT: Our dollar has value ONLY as a medium of exchange. It retains its value as long as each and every one of us remains willing to accept these intrinsically worthless pieces of paper for goods and services. M1 versus M2 The two official definitions of money used most often are: M1 = Currency held by the public + Demand Deposits Outside of Commercial Banks does not include Vault Cash Checking Accounts Travelers Checks M2 = M1 + Time Deposits Savings Accounts Certificates of Deposit (CDs) Money Market Mutual Fund Accounts M2 is less liquid than M1 Fractional Reserve Banking in Gold City...
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Money%20and%20Banking%20-%20HO%202 - Money Q: What is...

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