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Chapter 1: Money & Inflation

Chapter 1: Money & Inflation. What is Money? Money is anything that is readily accepted in payment of a debt. Types of Money Full-Bodied Money (Hard Money) “debased” and “fiat” money Representative Money: Example, Silver Certificates. Credit Money – “fiat” money.

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Chapter 1: Money & Inflation

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  1. Chapter 1: Money & Inflation What is Money? Money is anything that is readily accepted in payment of a debt. Types of Money • Full-Bodied Money (Hard Money) • “debased” and “fiat” money • Representative Money: Example, Silver Certificates. • Credit Money – “fiat” money. • Seigniorage – difference between the value of money & its cost.

  2. GOVERNMENT REVENUE GENERATED BY PENNY PRODUCTION • In 1994, production of the penny generated over $40 million in revenue for the Treasury, which the government posts as a profit. (Revenue is a result of seigniorage - the difference between the face value of the coin and the costs of its mintage.) • In 1994, the U.S. Mint produced over 13 billion pennies to meet broad public demand. • The penny costs only .7 cents to make, so the Treasury makes .3 cents on each penny minted.  • In the last 15 years, seigniorage from the penny has earned the Treasury over $500 million.

  3. Operational Definitions of Money • M1 = currency + checkable deposits • M2 = M1 + savings accts. & small denomination time deposits • M3 = M2 + large denominaiton (+100K) time deposits • L = M3 + all other liquid financial assets (t-bills, commercial paper etc.)

  4. Money Substitutes • Credit Cards • Debit Cards • Money Market Mutual Funds (Included in M2 & M3) • What is a Mutual Fund? • Money & the Economy • Quantity Theory: MV = PQ or M = (1/v) * GDP

  5. The Value of Money: money is worth what it will buy. Measuring the Change in the Value of Money: use a Price Index. Various Price Indexes: • CPI, PPI, GDP deflator, etc. Example of a Price Index: Price Value of Year Index % chg. Money % chg. 1960 22.1 - 4.5 - 1970 28.5 29.3% 3.5 -22.7% 1980 55.1 93.0% 1.8 -48.2% 1990 85.2 54.6% 1.2 -35.3% 2000 106.1 24.6% 0.9 -19.7%

  6. Money & Inflation: Inflation Destroys the Value of Money Using a Price Index to Measure the Change in Purchasing Power: Real Value = Nominal Value/Price Index Price Nominal Real Yr Index % Chg. Salary % Chg. Salary % Chg. 90 85.2 - $50,000 - $58,685 - 00 106.1 24.6% $95,000 90.0% $89,538 52.6%

  7. Homework: On Page 27: • Problems 1-1, 1-2, 1-3, & 1-5 

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