UNC-Chapel Hill ECON 101 - Money and the Banking System (3 pages)

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Money and the Banking System

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Money and the Banking System


Money, money market and banking system

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Lecture Note
University of North Carolina at Chapel Hill
Econ 101 - Introduction to Economics

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ECON 101 1st Edition Lecture 9 Money the Money Market and the Banking System Definition of Money why do people hold and use money Money is a medium of exchange o The definition of money has varied a great deal over the past 7 8 decades In order to be usable as a medium of exchange an asset must be 1 acceptable 2 protected from counterfeiting and 3 divisible for small transactions Money is a store of value o Allows one to store up purchasing power until you need it Cash is a store of value but its not as desirable because it doesn t allow the collection of interest its not protected against inflation and it subject to theft Money is a unit of account o valuable as a measure of the relative value of different commodities provides a way of recording receipts expenditures assets and liabilities Demand for Money Money is a very valuable commodity but in order for you to physically hold money in your possession there involves an opportunity cost o If you hold cash or put your money in a checking account you forego the interest you could earn if you put the funds into a savings account or into a money market fund or lent it so someone Speculative motive holding less money when interest rates are high and more when they are low Consequently the higher the interest rate the higher the opportunity cost of holding money the less you are likely to want to hold 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 o If the interest rate is the price of holding money the demand curve with respect to the interest rate will be downward sloping Transactions demand We need to hold money simply to make transactions on a daily weekly or monthly basis Generally the higher our incomes the more transactions we are likely to make and the higher our transaction demand for money Precautionary motive we hold money to protect us in case of an emergency Also individuals hold money due to

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