Money - 1 (Not on second Midterm) Ch. 9 Money, the Price...

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Unformatted text preview: 1 (Not on second Midterm) Ch. 9 Money, the Price Level and I nflation I . What is Money? Examples of items used as money: seashells, cigarettes, gold, salt A. Definition: Money is any commodity that is generally accepted as a means of payment. I n economic terminology, money is not income or wealth as in everyday usage. R.A. Radford The Economic Organization of a POW camp Gold pieces, Shells, beads, tobacco, salt, cigarettes Read about POW camp 2 B. 3 functions of money Medium of Exchange A medium of exchange is an object that is generally accepted in exchange for goods and services. I n the absence of money, people would need to exchange goods and services directly, which is called bar ter . Barter requires a double coincidence of wants, which is rare, so barter is costly. Money allows for greater specialization Unit of Account A unit of account is an agreed measure for stating the prices of goods and services. Prices in US are quoted in $. I n I srael during the high inflation, they quoted their prices in dollars Store of Value As a store of value, money can be held for a time and later exchanged for goods and services. Disadvntg doesnt pay inerest, inflation and decrease in value of money, risk of being stollen Adv anonymous and difficult to trace Money allows greater specialization All prices quoted in $ - I n I srael during high inflation, used $ to quote prices D/ A: doesnt pay interest, risk of being stolen Adv. anonymous & difficult to trace 3 C. Measur ing Money There is no clear distinction a continuum of ease of converting for use in exchange. The two main official measures of money in the United States are M1 and M2. Liquidity M1 consists of currency and travelers checks and checking deposits owned by individuals and businesses. Doesnt count currency held in banks or the govt M2 consists of M1 plus time, saving deposits, money market mutual funds, and other deposits. As of Dec. 2007: Currency + travelers checks:$770 billion Checkable deposits:$613 billion M1 - $1384 M2 - $7485.3 $770.3 billion 613.7 $1,384 $7,485.3 M1 does not include currency held by banks or by government 4 I I . Depositor y I nstitutions A. A depositor y institution is a firm that takes deposits from households and firms and makes loans to other households and firms. Financial intermidiary A. The institutions in the banking system divide into Commercial banks Thrift institutions Money market mutual funds We will talk about each one 5 1. Commercial Banks A commercial bank is a private firm that receives deposits and makes loans. Tr ade-off between pr ofit and pr udence- Loans generate profit, but depositors must be able to obtain their funds when they want them....
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This note was uploaded on 04/07/2008 for the course GENERAL ED MMW 1,2; E taught by Professor Vandehey during the Spring '08 term at UCSD.

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Money - 1 (Not on second Midterm) Ch. 9 Money, the Price...

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