Chapter 13 Money & Banking System

Chapter 13 Money & Banking System - Money & banking...

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Central banking Chapter 13: Understanding their origins and development takes the mystery out of money and banking. Understanding the monetary system is key to understanding many macro issues.
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the origins of money Money resulted from the unintended consequences of human action – not instituted by the state. What is money? Money is the most marketable commodity that people acquire in order to trade it for something later. In pre-money, pre-government times, enterprising individuals perceived that it was in their best interest to acquire a more marketable good even though they didn’t need it. Example: salt.
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Marketability plays a key role in what commodity eventually becomes money. Some goods are more marketable than others. Oil is more marketable than violin lessons. Marketability can be measured by bid-ask spreads. Liquidity refers to the ability to sell something with little or no loss of value. Something that is easily convert to cash without loss of value
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Huge economic benefits from the use of money: functions of money 1. Medium (or “tool”) of exchange Solves the “double coincidence of wants” problem of barter [ pianist that needs gas doesn’t have to find a service station that wants to hear a concerto] [ high transactions costs ]. Enhances specialization 2. Store of value (reflects unconsumed production)—sustains value 3. Unit of account (calculations of o.c. The moral basis of money The famous “money” speech by Francisco d’Aconia “So you think that money is the root of all evil.” http://www.working-minds.com/money.htm
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Three broad types of “money” each with distinct characteristics Commodity money Like gold and silver Bank money (liabilities/IOUs issued by banks) Deposits – demand, checkable, savings Banknotes (private issue prohibited) Checks are an order to pay Fiat money : decreed by law to be money- The value of bank money is tied to currency (or commodity) and is not inflationary or deflationary. Fiat money is not convertible nor tied to a commodity hence potentially inflationary .
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Coins Invention of coins reduced transactions costs. Reduces transactions costs of having dust or nuggets constantly assayed . First metal coins minted 650 BC (electrum alloy). Milling & raised images introduced to remedy defacing & clipping problem.
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This note was uploaded on 04/01/2012 for the course ECON 101 taught by Professor Balaban during the Fall '07 term at UNC.

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Chapter 13 Money & Banking System - Money & banking...

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