ECON 1051 1nd Edition Lecture 47 Outline of Last Lecture I. Market For Loanable FundsII. Factors That Change Demand For FundsIII. National Savings Outline of Current Lecture I. What Is Money?a. Thing of Value b. Barter and the Invention of Money c. The Function of Money d. What Can Serve As Money?Current LectureI. What Is Money?a. Thing of Value:i. Money 1. Assets that people are generally willing to accept in exchange for goods and services or for payments of debtsii. Asset 1. Anything of value owned by a person or a firm b. Barter and the Invention of Money i. Barter Economies1. Economies where goods and services are traded directly for other goods and services ii. Double Coincidence of Wants:1. For a barter trade to take place between two people, each person must want what the other one has2. Money lowers transaction costs of trading or exchangingiii. Commodity Money 1. A good used as money that also has value independent of its use as money a. By making exchange easier, money allows people to specialize and become more productive while pursuing their comparative advantage c. The Function of Money These 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.i. Anything used as money should fulfill the following three functions:1. Medium of Exchangea. Everyone has to be willing to accept it as an exchange of goods and services b. An economy is more efficient when a single good is recognized as a medium of exchange2. Unit of accounta. Once a single good is used as money, each good has a single price rather than many prices as in a barter system b. This gives buyers and sellers a unit of account, a way of measuring value in the economy in terms of money3. Store of valuea. Use it to accumulate wealth i. An asset represents a store of value b. Liquidity is the ease with which an asset can be converted into the medium of exchange i. Although money is the most liquid asset, other assets offer a greater return d. What Can Serve As Money?i. Five criteria make a good suitable for use as a medium of exchange:1. The good must be acceptable to (that is, usable by) most people2. It should be of standardized quality so that any two units are identical 3. It should be durable so that value is not lost spoilage 4. It should be valuable to its weight so that amounts large enough to be useful in trade can be easily transported 5. The medium of exchange should de divisible because different goods are valued differently ii. Commodity Money 1. Independent of its use, the value of commodity money, such as gold, depends on its purity iii. Fiat Money 1. In modern economies, paper currency is generally issued by a central bank, which is an agency of the government that regulates the money supply 2. A U.S. dollar bill is actually a Federal Reserve Note, issued by the Federal Reserve a. Federal Reserve = a central bank of USiv. M1 1. The narrowest definition of the money supply: the sum of currency in circulation, checking account deposits in banks, and holdings of traveler’s checksa. Currency b. The value of all checking account deposits at banksv. M2 1. A broader definition of the money supplya. It includes M1 plus: i. Savings account balances,ii. Small-denomination time deposits1. CDiii. Balances in money market deposit accounts in banksiv. Non-institutional money market for fund sharesb. Small-denomination time deposits are similar to savings accounts, but the deposits are for a fixed period of time – usually from six months to several years – and withdrawalsbefore that time are subject to a penalty c. Money Market mutual funds invest in short-term bonds, such as U.S. Treasury Bills i. Money marked security = anything that expires in less than a
View Full Document
Unlocking...