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“What is money?” – An overview of the monetary system of a modern economy

“What is money?” – An overview of the monetary system of a modern economy. Mishkin, Chap 3. Definition of “money” in economics ( not to be confused with “wealth”, “income”, “funds”). “ money ” = any object that serves as: 1. 2. 3. Three roles: Role 1:

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“What is money?” – An overview of the monetary system of a modern economy

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  1. “What is money?” – An overview of the monetary system of a modern economy Mishkin, Chap 3

  2. Definition of “money” in economics (not to be confused with “wealth”, “income”, “funds”). • “money” = any object that serves as: • 1. • 2. • 3. • Three roles: • Role 1: • A “monetized” economy is more efficient than a economy for two important reasons. • a. • b.

  3. An effective _____________ must be: • Role 2: • Suppose you live in a barter economy with 10 goods. How many relative prices do you need to memorize to trade? • How many relative prices do you need to memorize in a barter economy with N goods? • Having a helps because

  4. Some frequently used words in economics: • a (nominal) price ____________________________________________ • anominal asset is one ________________________________________ • areal or indexed asset is one ___________________________________ • inflationis ________________________________________________ • a hyperinflation is __________________________________________ • deflationis ________________________________________________ • depreciation of the home currency in international currency markets describes a situation in which ______________________________________________ • transaction costs

  5. Role 3: A good must have two features: 1. Currency is ________________________. Most financial assets _____________________________. Short term assets are _____________________________________________. Assets ______________________ must also have a higher level of return to compensate. 2. Assets ______________________ must also have a higher level of return to compensate. The extra return that assets ____________________________________ must yield over what other alternatives yield is known as ____________________.

  6. III. Different stages in the evolution of the payments system and some of their interesting features: • Barter: • Commodity money: • Paper currency (fiat money):

  7. Bank checks, credit cards: • Electronic payments systems: • E-money:

  8. IV. Measures of money supply: • Financial assets differ in their abilities to serve the 3 functions discussed so far. This leads to different measures of money. Some standard measures or monetary aggregates defined by the FED: • M1 = • M2 = M1 +

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