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Seminar

Seminar. Why does government debt matter? What can be done about it?. 09 Money & Banking. English for economics: Geoff Cockayne 2011. What is money?. medium of exchange store of value inflation, commoditisation of money unit of account elimination of ‘cash’?. Why do we trust money?.

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Seminar

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  1. Seminar Why does government debt matter? What can be done about it?

  2. 09 Money & Banking English for economics: Geoff Cockayne 2011

  3. What is money? • medium of exchange • store of value • inflation, commoditisation of money • unit of account • elimination of ‘cash’?

  4. Why do we trust money? • backed by gold • UK = £22bn (Telegraph 2011), money supply = £1,500 bn (Bank of England 2011) • government fiat • control of inflation

  5. Classification of money (simplified) • M0 • Notes and coins • M1 • M0 + ‘on demand’ deposits • M2 • M1 + time deposits

  6. Where does money come from? • central bank purchases government bonds: M2 • payment is deposited with private banks: M1/2 • banks lend and issue currency as required: M0/1/2 • money supply determined by demand

  7. How government controls money supply • central bank purchases gov’t bonds • recorded as loan in bank’s accounts • increased M2 • reduced interest rates • increased consumer borrowing The price of bonds is the interest rate. The price (value) of money is 1/inflation.

  8. Exchange rates • increased demand for Chinese goods = increased demand for RMB • increased demand for RMB = increased price of RMB • i.e. more $ required to buy RMB

  9. Is the RMB undervalued? • RMB/$ appreciation since 2000 ≈ 20%.

  10. Is the RMB undervalued? US goods purchases are matched by Chinese bond purchases

  11. International trade • benefits all societies • absolute advantage • comparative advantage • specialisation

  12. Comparative advantage

  13. Why are some countries poor?

  14. References De Soto, H. (2003) The Mystery of Capital. New York: Basic Books. Lipsey,R. & Chrystal, K. (2007) Economics: Eleventh Edition. Oxford: OUP. Parkin, M. (2010) Economics: ninth edition. London: Pearson.

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