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O-K-State ECON 2203 - Principles of Macroeconomics
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Econ 2203 1st Edition Lecture 17KeyDefinitionsImportant InformationFill in the blankExamplesEquationsOutlineWhat is Money? Barter system; double coincidence of wants The Kinds of Money The functions of MoneyMoney in the U.S. Economy M1 and M2The Federal Reserve System The Fed’s Organization The Federal Open Market CommitteeBanks and Money Supply Basic concepts about banksT-accountsReserve ratio How banks influence money supply? Case 1: No banking system Case 2: 100% reserve banking system Case 3: Fractional reserve banking systemo Money multiplierHow the Federal Reserve control money supply? 5 toolsWhat is Money?Barter (no money) --- Shining Shells/Gold, Silver (commodity money)--- Paper Currency (fiat money)Barter – the direct exchange of one good or service for another good or serviceo Problem: can only be successful in small economiesMoney – the set of assets in an economy that people regularly use to buy goods and services from other peopleThe Kinds of MoneyThese notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.Commodity money – money that takes the form of a commodity with intrinsic valueo Intrinsic value means that the item would have value even if it were not used as money– Examples: Cigarettes in prisoner-of-war camps during World War II.Fiat money – money without intrinsic value that is used as money because of government decreeo It would be worthless if it were not used as moneyo Dependent on governmental decree, expectations, and social convention– Example: Compare dollars in a wallet and dollars in the monopoly game- The U.S. decreed that the money has value and so it doesThe Functions of Money (distinguish money from other assets)Medium of exchange – an item buyers give to sellers when they want to purchase goods and services– Example: You give money to a store and receive a shirt. The money is the commonly accepted medium of exchangeUnit of account – the yardstick people use to post prices and record debtso This is the only way to compare the value of assets– Example: Going shopping and a shirt costs $30, but a burger costs $3- $ is the unit of account  This allows comparisonsStore of value – an item people can use to transfer purchasing power from the present to the futureo Inflation (increase of prices) causes store of value to decrease, which can lead to the discontinued use of some currencieso In order to store value, money must retain purchasing power over time– Examples: Seller accepts money in exchange- Sellers can hold the money and become the buyers or a person can transfer the purchasing power through stocks and bondsWealth – total of all stores of value, including money and nonmonetary assetsQuestions:You would like to take a trip for Spring break. The trip to Alaska is priced at $4,000. The trip to Albuquerque is priced at $1,000. You have $2,500 in your checking account. Medium of exchange Unit of account Store of valueYou can easily determine that the trip to ABQ is cheaper than the tripto Alaska.You have $2,500 in your checking accountYou write a check for $1,000 to pay your ABQ trip.A Key Property of MoneyLiquidity – the ease with which an asset can be converted into the economy’s medium of exchangeo Money is completely liquid.Question: Ranking the following assets in order of their liquidity. $20 bills, a house, funds in a saving account, and a share of stock.Most liquid $20 BillsSecond-Most Liquid Funds in a savings accountThird-Most LiquidShare of stockLeast Liquid A


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O-K-State ECON 2203 - Principles of Macroeconomics

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