week11 single session - Money and Banking EC1301 Week 11...

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Money and Banking EC1301 Week 11 Read: Chapter 25 (including Appendix)
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Outline Money = Medium of Exchange Fiat Money Measuring the Money Supply The Financial System How banks create money Why regulate banks? Using the Theory: The Financial Crisis of 2008 2
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Money = Medium of Exchange Main role of money is that of Medium of Exchange (Means of payment) Money allows people to make exchanges without needing to barter i.e. directly exchanging goods for other goods Barter is inefficient because it restricts trades mainly to those where each party has exactly what the other party wants 3
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Money = Medium of Exchange Any commodity that is accepted by a society as a medium of exchange is considered money Cattle (Wales in medieval times) Whales’ teeth (traditional Fiji society) Metals, precious or non-precious Paper, plastic Cigarettes in prison economies Suitable commodities: transportable, divisible, retains exchange value over time 4
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If money didn’t exist, people would re-invent it 5
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Other functions of money Unit of account Since trades are done with money, use money as a measuring stick for valuations, record keeping Store of value (Asset) Asset = something of value owned by you People can store purchasing power by buying assets When purchasing power is needed, sell the asset for money One way to store purchasing power is to hold money 6
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Fiat Money Commodity money has Intrinsic Value from its non-money use E.g. gold coins can be melted to make jewelry and high-conductive wires By contrast, Fiat Money has no intrinsic value Created by government as Legal Tender Retains value only if others are willing to accept it as payment 7
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Fiat money and Hyperinflation Governments are often tempted to finance budget deficits by printing money rather than by borrowing If governments do this, inevitably inflation will rise rapidly, forcing governments to print even more money, forcing higher inflation … 8
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How do hyperinflations end? The existing fiat money will eventually become worthless because nobody will accept it Either the government issues a new currency (Germany) Or the people settle on using a replacement currency (Zimbabwe) 9
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Measuring the money supply Many assets have characteristics of money, so what counts as money and what doesn’t is often a judgment call Also, many assets are liquid : heavily traded and can thus be sold for money very quickly and at low cost Governments categorize various monetary and money-like assets into categories according to liquidity 10
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Measuring the money supply M1: Ultra liquid, accepted as payment for purchases Cash held by public, checking account deposits, traveler’s checks M2 = M1 + highly liquid assets Savings deposits, small-denomination time notes, money market mutual funds M3 = M2 + slightly less liquid assets 11
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Singapore’s money supply 12 Source: Monetary Authority of Singapore S$ million Currency in
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This note was uploaded on 04/08/2012 for the course ECON 1301 taught by Professor Wan during the Spring '11 term at National University of Singapore.

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week11 single session - Money and Banking EC1301 Week 11...

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