1. Money serves four key functions: as a medium of exchange, a unit of account, a store of value, and a standard of deferred payment.
2. The quantity theory of money asserts that inflation is related to the growth of the money supply. When the money supply grows faster than real GDP, inflation increases.
3. Hyperinflation, where prices increase over 100% per year, occurs when both the money supply and velocity of money grow rapidly without corresponding increases in real GDP. Governments printing money to fund deficits can cause hyperinflation.
The document discusses the functions and types of money, how banks create money through fractional-reserve banking, and how the money supply is affected. It explains that money serves as a medium of exchange, unit of account, and store of value. Banks hold reserves and make loans, increasing the money supply through the money multiplier effect. The Federal Reserve uses tools like open market operations and reserve requirements to influence the money supply and inflation.
The document discusses money, inflation, and how the central bank can control inflation in the long run. It defines money and its key functions as a medium of exchange, unit of account, and store of value. It explains that inflation is a general increase in prices and discusses factors that determine demand for and supply of money. The main point is that in the long run, the central bank can control inflation by controlling the money supply, as increased money supply growth above production growth will lead to higher inflation. However, seignorage and "printing money" can only finance a small portion of government expenditure without causing high inflation.
This document provides an overview of economics topics related to money including:
- Definitions of money and the money supply (M1, M2, M3)
- Characteristics of money such as acceptability, stability, divisibility
- Functions of money as a medium of exchange, store of value, and unit of account
- Factors that influence the supply and demand of money including interest rates, income levels, and price levels
- Relationship between real and nominal money balances and how inflation impacts demand
- Tools of monetary policy used by central banks including open market operations, reserve requirements, and discount rates
This document provides an overview of money and monetary policy. It defines money, describes its key functions such as a medium of exchange and store of value. It discusses components of the money supply, the demand and supply of money, and methods that central banks use to influence the money supply such as adjusting interest rates or reserve requirements. The document also covers the quantity theory of money, the relationship between money supply and inflation, and how monetary policy can promote economic growth.
This document summarizes theories of money demand, including the quantity theory of money and Keynes' liquidity preference theory. The quantity theory views money demand as a function of income only, while Keynes argued it depends on both income and interest rates. Later economists like Tobin and Baumol refined Keynes' model by showing transaction demand also responds to interest rates due to opportunity costs of holding money. Precautionary and speculative demand motives are likewise negatively related to interest rates.
1) The document discusses the classical theory of inflation and the costs of inflation. It provides historical examples of inflation rates over time including hyperinflation events.
2) Hyperinflation is defined as inflation exceeding 50% per month and examples are given from Austria, Hungary, Germany and Poland in the early 1920s where prices increased dramatically as money supplies rose rapidly.
3) The costs of inflation discussed include shoe leather costs from having to visit banks more often, menu costs to update prices, tax distortions from not adjusting for inflation, and effects on savings from the reduction of purchasing power over time.
This document discusses several topics related to money, including:
1. It defines money supply and its determinants, and explains that money supply is composed of currency with the public and demand deposits with the public.
2. It lists factors that can increase money supply such as expansionary monetary policy through open market purchases or decreasing reserve requirements.
3. It discusses problems with implementing monetary policy in Bangladesh, including the existence of non-monetized sectors, excess non-banking financial institutions, and unorganized financial markets.
Monetary policy in Bangladesh is conducted by the Bangladesh Bank using reserve money and broad money as targets to influence money supply and achieve goals like price stability and economic growth. The key tools used are open market operations, the discount rate, and reserve requirements. While monetary policy aims to control inflation, mismatches with fiscal policy can limit its effectiveness if large budget deficits are financed by money creation rather than taxes or bond issues. Coordination between monetary and fiscal authorities is important for sound macroeconomic management.
The document discusses the functions and types of money, how banks create money through fractional-reserve banking, and how the money supply is affected. It explains that money serves as a medium of exchange, unit of account, and store of value. Banks hold reserves and make loans, increasing the money supply through the money multiplier effect. The Federal Reserve uses tools like open market operations and reserve requirements to influence the money supply and inflation.
The document discusses money, inflation, and how the central bank can control inflation in the long run. It defines money and its key functions as a medium of exchange, unit of account, and store of value. It explains that inflation is a general increase in prices and discusses factors that determine demand for and supply of money. The main point is that in the long run, the central bank can control inflation by controlling the money supply, as increased money supply growth above production growth will lead to higher inflation. However, seignorage and "printing money" can only finance a small portion of government expenditure without causing high inflation.
This document provides an overview of economics topics related to money including:
- Definitions of money and the money supply (M1, M2, M3)
- Characteristics of money such as acceptability, stability, divisibility
- Functions of money as a medium of exchange, store of value, and unit of account
- Factors that influence the supply and demand of money including interest rates, income levels, and price levels
- Relationship between real and nominal money balances and how inflation impacts demand
- Tools of monetary policy used by central banks including open market operations, reserve requirements, and discount rates
This document provides an overview of money and monetary policy. It defines money, describes its key functions such as a medium of exchange and store of value. It discusses components of the money supply, the demand and supply of money, and methods that central banks use to influence the money supply such as adjusting interest rates or reserve requirements. The document also covers the quantity theory of money, the relationship between money supply and inflation, and how monetary policy can promote economic growth.
This document summarizes theories of money demand, including the quantity theory of money and Keynes' liquidity preference theory. The quantity theory views money demand as a function of income only, while Keynes argued it depends on both income and interest rates. Later economists like Tobin and Baumol refined Keynes' model by showing transaction demand also responds to interest rates due to opportunity costs of holding money. Precautionary and speculative demand motives are likewise negatively related to interest rates.
1) The document discusses the classical theory of inflation and the costs of inflation. It provides historical examples of inflation rates over time including hyperinflation events.
2) Hyperinflation is defined as inflation exceeding 50% per month and examples are given from Austria, Hungary, Germany and Poland in the early 1920s where prices increased dramatically as money supplies rose rapidly.
3) The costs of inflation discussed include shoe leather costs from having to visit banks more often, menu costs to update prices, tax distortions from not adjusting for inflation, and effects on savings from the reduction of purchasing power over time.
This document discusses several topics related to money, including:
1. It defines money supply and its determinants, and explains that money supply is composed of currency with the public and demand deposits with the public.
2. It lists factors that can increase money supply such as expansionary monetary policy through open market purchases or decreasing reserve requirements.
3. It discusses problems with implementing monetary policy in Bangladesh, including the existence of non-monetized sectors, excess non-banking financial institutions, and unorganized financial markets.
Monetary policy in Bangladesh is conducted by the Bangladesh Bank using reserve money and broad money as targets to influence money supply and achieve goals like price stability and economic growth. The key tools used are open market operations, the discount rate, and reserve requirements. While monetary policy aims to control inflation, mismatches with fiscal policy can limit its effectiveness if large budget deficits are financed by money creation rather than taxes or bond issues. Coordination between monetary and fiscal authorities is important for sound macroeconomic management.
This document discusses the concept of money and monetary policy. It defines money as any object or record that is generally accepted as payment. Modern money systems are based on fiat currency which derives its value from government declaration rather than intrinsic value. The money supply consists of currency and bank deposits. Monetary policy aims to control inflation and the money supply through interest rates and other tools. Different approaches to monetary policy are described, including inflation targeting and using monetary aggregates.
The money supply and inflation ppt @ bec domsBabasab Patil
1. China is experiencing high inflation which can be explained by increases in the money supply.
2. The central bank, called the Federal Reserve, controls the money supply through open market operations and by adjusting reserve requirements and interest rates.
3. When the money supply increases, either the price level rises or output increases as shown by the quantity theory of money equation.
The money supply and inflation ppt @ bec domsBabasab Patil
1. China is experiencing high inflation which can be explained by increases in the money supply.
2. The central bank, called the Federal Reserve, controls the money supply through open market operations and by adjusting reserve requirements and interest rates.
3. When the money supply increases, either the price level rises or output increases as shown by the Quantity Theory of Money equation.
This document provides an overview of money and banking concepts. It begins with a discussion of barter economies and how money emerged to overcome shortcomings of barter. It then covers qualities and types of money, as well as the functions of money. The document also discusses demand and supply of money, the structure and functions of commercial banks, types of financial instruments, and provides an overview of Sri Lanka's financial system.
This document discusses inflation and its effects. It defines inflation as a rise in prices over time that erodes purchasing power. Inflation can have positive or negative impacts. Theories of inflation are then presented, including the quantity theory of money which links inflation to money supply growth. Expected versus unexpected inflation are distinguished. Social costs of inflation include shoeleather costs, menu costs, relative price distortions, and unfair tax treatment when inflation is expected. Hyperinflation greatly exacerbates all these costs.
CHAPTER III MONEY GROWTH AND INFLATION.pdfMengsongNguon
The document discusses several key aspects of inflation and its causes according to economic theory:
1. Inflation is caused by increases in the money supply beyond growth in the real output of the economy. The quantity theory of money posits that changes in the money supply directly impact the price level.
2. An increase in the money supply lowers the value of money and raises the price level in the long run until monetary equilibrium is reached.
3. Governments can cause hyperinflation by printing too much money to fund spending, in effect imposing an "inflation tax" on holders of the currency.
4. Inflation imposes economic costs like shoe leather costs, menu costs, tax
This chapter discusses the relationship between money, inflation, and prices according to the quantity theory of money. It introduces key concepts such as the money supply, monetary policy, the quantity equation, velocity of money, and how the money supply and inflation are connected. The quantity theory predicts a direct relationship between the growth of the money supply and the inflation rate in the long run.
State or Market: Mystery of Money-RevealedAsad Zaman
{writeup/Video: http://bit.ly/azGian01A} There is an age-old controversy regarding money. Free market proponents believe that money emerges naturally to facilitate exchange among private parties. State Theorist hold that money is a creation of the state, which acquires value by force of law. Giannini resolves this controversy by showing that both state and market are necessary aspects of money.
This document summarizes key concepts from Chapter 4 of an economics textbook, including definitions of money, inflation, the money supply, monetary policy conducted by central banks like the Federal Reserve, the quantity theory of money, the relationship between inflation and interest rates described by the Fisher equation, and costs of inflation like shoe-leather costs and menu costs. It also discusses money demand functions, the distinction between real and nominal variables, and the concept of monetary neutrality in the long run.
Money, banking, and financial institutionssajal islam
The document discusses several key concepts related to money and banking:
1. It defines money as having three main functions: medium of exchange, unit of account, and store of value.
2. It explains the different measures of money supply (M1, M2, M3) and what types of assets are included in each measure.
3. It discusses what gives money its value, including acceptability, being declared legal tender, and maintaining relative scarcity through central bank management of the supply.
The document discusses the definition, origins, functions, and types of money. It begins by defining money in several ways, such as anything that serves as a medium of exchange, store of value, and unit of account. Money has evolved from commodity money to electronic money. The primary functions of money are as a medium of exchange, store of value, and unit of account. The document also discusses monetary policy, the quantity theory of money, inflation, deflation, and types of paper money.
This document discusses monetary policy and related concepts. It defines money, describes its functions like medium of exchange and store of value. It explains different measures of money supply and the importance of money in capitalist and socialist economies. The document also discusses instruments of monetary policy like bank rate and open market operations. It covers concepts like inflation, deflation, and the quantity theory of money. Inflation can be of different types like demand-pull and cost-push. Measures to control inflation include increased taxation and import restrictions. Deflation causes issues like unemployment and losses for producers.
Money: Definition, Origin, Functions, Inflation, Deflation, Value of Money, M...flowerpower_1324
These slides cover the first chapter of the B.Com "Banking and Finance" syllabus: Money.
It includes the following topics: Definition, Origin, Functions, Inflation and its remedies, , Deflation and its causes, reflation, devaluation, , Monetary and Fiscal Policy, Paper Money: its kinds and advantages and disadvanatges, Monetary system, Value of Money: quantity theory of money, cash balance approach, modern theory of money.
Money was not used in early history as exchanges were done through bartering. Definitions of money include anything widely accepted for payments or that acts as a medium of exchange, store of value, and unit of account. Money serves four main functions: medium of exchange, store of value, unit of account, and deferred payment. The money supply is the total amount of money available in an economy and is composed of currency and demand deposits. It is determined by the monetary base and money multiplier. Money supply measurements include M0, M1, M2, M3, and M4. Inflation is a sustained increase in the general price level and can be caused by an increase in the money supply, decrease in goods supply
This document contains information about various financial concepts such as money, markets, banking, and monetary policy. It defines money and describes its functions. It also defines different types of markets including money markets, capital markets, primary markets, secondary markets, and over-the-counter markets. Additionally, it discusses financial institutions and their role in the economy, central banks and monetary policy, and the functions and balance sheet of banks.
1. The document discusses several key concepts related to money including its functions as a medium of exchange, unit of account, and store of value. It also discusses different monetary aggregates like M1, M2, and M3.
2. The quantity theory of money posits that the overall price level in an economy is determined by the supply of money, and that increasing the money supply will cause proportionate increases in the price level over the long run.
3. When the central bank increases the money supply, it can lead to inflation as prices rise in response to bring money supply and demand into equilibrium.
Macroeconomics II: ISLM Framework, Monetary, and Fiscal Policy, Upananda Witta
The document provides an overview of the IS-LM framework for macroeconomic analysis. It discusses the relationship between goods markets and money markets, and how equilibrium is reached. It also outlines the derivation of the IS and LM curves and how they are used to show equilibrium between interest rates and income. Fiscal and monetary policies can be used to shift the curves and achieve different macroeconomic outcomes like increasing output. The document contains several chapters that cover these topics at a conceptual level.
This document discusses various theories of monetary policy and inflation. It begins by explaining that less developed countries often struggle with high inflation and unemployment due to low production and high population growth. It then discusses monetary theory, including the quantity theory of money formula MV=PQ. It notes that monetary theory is controlled by central governments in many developing economies. The document also discusses criticisms of monetary theory, definitions of inflation, causes of inflation according to Keynesian and monetarist theories, examples of hyperinflation and stagflation, negative inflation/deflation, and the objectives of monetary policies.
B2B payments are rapidly changing. Find out the 5 key questions you need to be asking yourself to be sure you are mastering B2B payments today. Learn more at www.BlueSnap.com.
This document discusses the concept of money and monetary policy. It defines money as any object or record that is generally accepted as payment. Modern money systems are based on fiat currency which derives its value from government declaration rather than intrinsic value. The money supply consists of currency and bank deposits. Monetary policy aims to control inflation and the money supply through interest rates and other tools. Different approaches to monetary policy are described, including inflation targeting and using monetary aggregates.
The money supply and inflation ppt @ bec domsBabasab Patil
1. China is experiencing high inflation which can be explained by increases in the money supply.
2. The central bank, called the Federal Reserve, controls the money supply through open market operations and by adjusting reserve requirements and interest rates.
3. When the money supply increases, either the price level rises or output increases as shown by the quantity theory of money equation.
The money supply and inflation ppt @ bec domsBabasab Patil
1. China is experiencing high inflation which can be explained by increases in the money supply.
2. The central bank, called the Federal Reserve, controls the money supply through open market operations and by adjusting reserve requirements and interest rates.
3. When the money supply increases, either the price level rises or output increases as shown by the Quantity Theory of Money equation.
This document provides an overview of money and banking concepts. It begins with a discussion of barter economies and how money emerged to overcome shortcomings of barter. It then covers qualities and types of money, as well as the functions of money. The document also discusses demand and supply of money, the structure and functions of commercial banks, types of financial instruments, and provides an overview of Sri Lanka's financial system.
This document discusses inflation and its effects. It defines inflation as a rise in prices over time that erodes purchasing power. Inflation can have positive or negative impacts. Theories of inflation are then presented, including the quantity theory of money which links inflation to money supply growth. Expected versus unexpected inflation are distinguished. Social costs of inflation include shoeleather costs, menu costs, relative price distortions, and unfair tax treatment when inflation is expected. Hyperinflation greatly exacerbates all these costs.
CHAPTER III MONEY GROWTH AND INFLATION.pdfMengsongNguon
The document discusses several key aspects of inflation and its causes according to economic theory:
1. Inflation is caused by increases in the money supply beyond growth in the real output of the economy. The quantity theory of money posits that changes in the money supply directly impact the price level.
2. An increase in the money supply lowers the value of money and raises the price level in the long run until monetary equilibrium is reached.
3. Governments can cause hyperinflation by printing too much money to fund spending, in effect imposing an "inflation tax" on holders of the currency.
4. Inflation imposes economic costs like shoe leather costs, menu costs, tax
This chapter discusses the relationship between money, inflation, and prices according to the quantity theory of money. It introduces key concepts such as the money supply, monetary policy, the quantity equation, velocity of money, and how the money supply and inflation are connected. The quantity theory predicts a direct relationship between the growth of the money supply and the inflation rate in the long run.
State or Market: Mystery of Money-RevealedAsad Zaman
{writeup/Video: http://bit.ly/azGian01A} There is an age-old controversy regarding money. Free market proponents believe that money emerges naturally to facilitate exchange among private parties. State Theorist hold that money is a creation of the state, which acquires value by force of law. Giannini resolves this controversy by showing that both state and market are necessary aspects of money.
This document summarizes key concepts from Chapter 4 of an economics textbook, including definitions of money, inflation, the money supply, monetary policy conducted by central banks like the Federal Reserve, the quantity theory of money, the relationship between inflation and interest rates described by the Fisher equation, and costs of inflation like shoe-leather costs and menu costs. It also discusses money demand functions, the distinction between real and nominal variables, and the concept of monetary neutrality in the long run.
Money, banking, and financial institutionssajal islam
The document discusses several key concepts related to money and banking:
1. It defines money as having three main functions: medium of exchange, unit of account, and store of value.
2. It explains the different measures of money supply (M1, M2, M3) and what types of assets are included in each measure.
3. It discusses what gives money its value, including acceptability, being declared legal tender, and maintaining relative scarcity through central bank management of the supply.
The document discusses the definition, origins, functions, and types of money. It begins by defining money in several ways, such as anything that serves as a medium of exchange, store of value, and unit of account. Money has evolved from commodity money to electronic money. The primary functions of money are as a medium of exchange, store of value, and unit of account. The document also discusses monetary policy, the quantity theory of money, inflation, deflation, and types of paper money.
This document discusses monetary policy and related concepts. It defines money, describes its functions like medium of exchange and store of value. It explains different measures of money supply and the importance of money in capitalist and socialist economies. The document also discusses instruments of monetary policy like bank rate and open market operations. It covers concepts like inflation, deflation, and the quantity theory of money. Inflation can be of different types like demand-pull and cost-push. Measures to control inflation include increased taxation and import restrictions. Deflation causes issues like unemployment and losses for producers.
Money: Definition, Origin, Functions, Inflation, Deflation, Value of Money, M...flowerpower_1324
These slides cover the first chapter of the B.Com "Banking and Finance" syllabus: Money.
It includes the following topics: Definition, Origin, Functions, Inflation and its remedies, , Deflation and its causes, reflation, devaluation, , Monetary and Fiscal Policy, Paper Money: its kinds and advantages and disadvanatges, Monetary system, Value of Money: quantity theory of money, cash balance approach, modern theory of money.
Money was not used in early history as exchanges were done through bartering. Definitions of money include anything widely accepted for payments or that acts as a medium of exchange, store of value, and unit of account. Money serves four main functions: medium of exchange, store of value, unit of account, and deferred payment. The money supply is the total amount of money available in an economy and is composed of currency and demand deposits. It is determined by the monetary base and money multiplier. Money supply measurements include M0, M1, M2, M3, and M4. Inflation is a sustained increase in the general price level and can be caused by an increase in the money supply, decrease in goods supply
This document contains information about various financial concepts such as money, markets, banking, and monetary policy. It defines money and describes its functions. It also defines different types of markets including money markets, capital markets, primary markets, secondary markets, and over-the-counter markets. Additionally, it discusses financial institutions and their role in the economy, central banks and monetary policy, and the functions and balance sheet of banks.
1. The document discusses several key concepts related to money including its functions as a medium of exchange, unit of account, and store of value. It also discusses different monetary aggregates like M1, M2, and M3.
2. The quantity theory of money posits that the overall price level in an economy is determined by the supply of money, and that increasing the money supply will cause proportionate increases in the price level over the long run.
3. When the central bank increases the money supply, it can lead to inflation as prices rise in response to bring money supply and demand into equilibrium.
Macroeconomics II: ISLM Framework, Monetary, and Fiscal Policy, Upananda Witta
The document provides an overview of the IS-LM framework for macroeconomic analysis. It discusses the relationship between goods markets and money markets, and how equilibrium is reached. It also outlines the derivation of the IS and LM curves and how they are used to show equilibrium between interest rates and income. Fiscal and monetary policies can be used to shift the curves and achieve different macroeconomic outcomes like increasing output. The document contains several chapters that cover these topics at a conceptual level.
This document discusses various theories of monetary policy and inflation. It begins by explaining that less developed countries often struggle with high inflation and unemployment due to low production and high population growth. It then discusses monetary theory, including the quantity theory of money formula MV=PQ. It notes that monetary theory is controlled by central governments in many developing economies. The document also discusses criticisms of monetary theory, definitions of inflation, causes of inflation according to Keynesian and monetarist theories, examples of hyperinflation and stagflation, negative inflation/deflation, and the objectives of monetary policies.
B2B payments are rapidly changing. Find out the 5 key questions you need to be asking yourself to be sure you are mastering B2B payments today. Learn more at www.BlueSnap.com.
Building Your Employer Brand with Social MediaLuanWise
Presented at The Global HR Summit, 6th June 2024
In this keynote, Luan Wise will provide invaluable insights to elevate your employer brand on social media platforms including LinkedIn, Facebook, Instagram, X (formerly Twitter) and TikTok. You'll learn how compelling content can authentically showcase your company culture, values, and employee experiences to support your talent acquisition and retention objectives. Additionally, you'll understand the power of employee advocacy to amplify reach and engagement – helping to position your organization as an employer of choice in today's competitive talent landscape.
At Techbox Square, in Singapore, we're not just creative web designers and developers, we're the driving force behind your brand identity. Contact us today.
Company Valuation webinar series - Tuesday, 4 June 2024FelixPerez547899
This session provided an update as to the latest valuation data in the UK and then delved into a discussion on the upcoming election and the impacts on valuation. We finished, as always with a Q&A
Taurus Zodiac Sign: Unveiling the Traits, Dates, and Horoscope Insights of th...my Pandit
Dive into the steadfast world of the Taurus Zodiac Sign. Discover the grounded, stable, and logical nature of Taurus individuals, and explore their key personality traits, important dates, and horoscope insights. Learn how the determination and patience of the Taurus sign make them the rock-steady achievers and anchors of the zodiac.
IMPACT Silver is a pure silver zinc producer with over $260 million in revenue since 2008 and a large 100% owned 210km Mexico land package - 2024 catalysts includes new 14% grade zinc Plomosas mine and 20,000m of fully funded exploration drilling.
Discover timeless style with the 2022 Vintage Roman Numerals Men's Ring. Crafted from premium stainless steel, this 6mm wide ring embodies elegance and durability. Perfect as a gift, it seamlessly blends classic Roman numeral detailing with modern sophistication, making it an ideal accessory for any occasion.
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In the Adani-Hindenburg case, what is SEBI investigating.pptxAdani case
Adani SEBI investigation revealed that the latter had sought information from five foreign jurisdictions concerning the holdings of the firm’s foreign portfolio investors (FPIs) in relation to the alleged violations of the MPS Regulations. Nevertheless, the economic interest of the twelve FPIs based in tax haven jurisdictions still needs to be determined. The Adani Group firms classed these FPIs as public shareholders. According to Hindenburg, FPIs were used to get around regulatory standards.
Event Report - SAP Sapphire 2024 Orlando - lots of innovation and old challengesHolger Mueller
Holger Mueller of Constellation Research shares his key takeaways from SAP's Sapphire confernece, held in Orlando, June 3rd till 5th 2024, in the Orange Convention Center.
Zodiac Signs and Food Preferences_ What Your Sign Says About Your Tastemy Pandit
Know what your zodiac sign says about your taste in food! Explore how the 12 zodiac signs influence your culinary preferences with insights from MyPandit. Dive into astrology and flavors!
Implicitly or explicitly all competing businesses employ a strategy to select a mix
of marketing resources. Formulating such competitive strategies fundamentally
involves recognizing relationships between elements of the marketing mix (e.g.,
price and product quality), as well as assessing competitive and market conditions
(i.e., industry structure in the language of economics).
Recruiting in the Digital Age: A Social Media MasterclassLuanWise
In this masterclass, presented at the Global HR Summit on 5th June 2024, Luan Wise explored the essential features of social media platforms that support talent acquisition, including LinkedIn, Facebook, Instagram, X (formerly Twitter) and TikTok.
2. Do We Need Money?
Economists define money very broadly as anything that is generally accepted
as payment for goods and services or in the settlement of debts.
3. Barter
Economies can function without money.
Barter A system of exchange in which individuals trade goods and services
directly for other goods and services.
Do We Need Money?
4. Barter
There are four main sources of inefficiency in a barter economy:
1. There must be a double coincidence of wants. The time and effort spent
searching for trading partners in a barter economy increases the transactions
costs.
2. Each good has many prices.
When there are N items: Number of prices = N(N – 1)/2.
3. There is a lack of standardization.
4. It is difficult to accumulate wealth.
Transactions costs The costs in time or other resources that parties incur
in the process of agreeing and carrying out an exchange of goods and
services.
Do We Need Money?
5. The Invention of Money
In growing an economy, there is an incentive to identify a specific product
that most people will generally accept in an exchange.
A good used as money that also has value independent of its use as
money is called commodity money.
• During a visit to Russia in 1989, one of the authors of this book
navigated with difficulty through the streets of Moscow because Russian
merchants and taxi drivers discouraged payments in rubles.
• Taxi drivers quoted fares in dollars, marks, and yen.
• For taxi drivers, Marlboro cigarettes were the commodity money of
choice.
Making the Connection
What’s Money? Ask a Taxi Driver!
Do We Need Money?
6. The Invention of Money
Once money is invented, people can specialize, become far more productive,
and earn higher incomes.
Specialization A system in which individuals produce the goods or services for
which they have relatively the best ability.
Do We Need Money?
7. The Key Functions of Money
Money serves four key functions in the economy:
1.It acts as a medium of exchange.
2.It is a unit of account.
3.It is a store of value.
4. It offers a standard of deferred payment.
Medium of Exchange
Medium of exchange Something that is generally accepted as payment for
goods and services; a function of money.
Unit of Account
Unit of account A way of measuring value in an economy in terms of money; a
function of money.
8. Store of Value
Store of value The accumulation of wealth by holding dollars or other assets
that can be used to buy goods and services in the future; a function of money.
Standard of Deferred Payment
Money can facilitate exchange not only at a point in time, but also over time, as
a standard of deferred payment.
• While you incur transactions costs when you exchange other assets for
money, money is, of course, perfectly liquid. People hold money to avoid
transactions costs, even though other assets offer a greater return as a store
of value.
The Key Functions of Money
9. Distinguishing Among Money, Income, and Wealth
• Money, like other assets, is a component of wealth, which is the sum of the
value of a person’s assets minus the value of the person’s liabilities.
• However, only if an asset serves as a medium of exchange can we call it
money.
• A person’s income is equal to his or her earnings over a period of time.
• So, a person typically has considerably less money than income or wealth.
The Key Functions of Money
10. The Importance of Checks
• Checks are promises to pay on demand money deposited with a bank or
other financial institution.
• The use of checks avoids the drawbacks of paper money, but also requires
more trust on the part of the seller.
The Payments System
11. Electronic Funds and Electronic Cash
• Electronic funds transfer systems have greatly improved the efficiency in
settling and clearing transactions. Here is how:
• Cash registers are linked to bank computers, so when a customer uses a
debit card, his bank instantly credits the store’s account. In this way, debit
cards eliminate the problem of trust.
• ACH transactions include direct deposits of payroll checks and electronic
transfers, which help to reduce transactions costs, the likelihood of missed
payments, and the costs of notifying borrowers of missed payments.
• ATMs add the convenience of withdrawing funds from your bank anytime,
away from your bank.
• E-money, or electronic money, is digital cash people use to buy goods and
services over the Internet.
The Payments System
12. Measuring the Money Supply
Monetary aggregates Measures of the quantity of money that are broader than
currency; M1 and M2.
Measuring Monetary Aggregates
M1 A narrower definition of the money supply: The sum of currency in
circulation, checking account deposits, and holdings of traveler’s checks.
M2 A broader definition of the money supply: all the assets that are included in
M1, as well as time deposits with a value of less than $100,000, savings
accounts, money market deposit accounts, and noninstitutional money market
mutual fund shares.
14. Irving Fisher and the Equation of Exchange
• The equation of exchange, MV = PY, states that the quantity of money, M,
multiplied by the velocity of money, V, equals the price level (or GDP
deflator), P, multiplied by the level of real GDP, Y.
• Note that PY equals nominal GDP, and that velocity, V = PY/M.
• Irving Fisher turned the equation of exchange (an identity) into the quantity
theory of money by asserting that velocity is constant.
Quantity theory of money A theory about the connection between money
and prices that assumes that the velocity of money is constant.
The Quantity Theory of Money: A First Look at the Link between Money and Prices
15. The Quantity Theory of Money: A First Look at the Link between Money and Prices
The Quantity Theory Explanation of Inflation
• We use the quantity equation expressed in percentage changes:
% Change in M + % Change in V = % Change in P + % Change in Y.
• Since the percentage change in the price level is inflation, then:
Inflation rate = % Change in M – % Change in Y
16. Solved Problem
The Relationship between Money and Income
2.5
The Quantity Theory of Money: A First Look at the Link between Money and Prices
Do you agree or disagree with the following statement: “It is not possible
for the total value of production to increase unless the money supply also
increases. After all, how can the value of the goods and services being
bought and sold increase unless there is more money available?”
17. Solved Problem
The Relationship between Money and Income
Solving the Problem
Step 1 Review the chapter material.
Step 2 Explain whether output in an economy can grow without the
money supply also growing.
The value of total production is measured by nominal GDP, or in symbols
PY. PY is the right side of the equation of exchange, so for it to increase,
the left side—MV—must also increase.
Nominal GDP could increase with the money supply remaining constant,
provided that V increases.
2.5
The Quantity Theory of Money: A First Look at the Link between Money and Prices
18. How Accurate Are Forecasts of Inflation Based on
the Quantity Theory?
• Since velocity is more erratic in the short run than in the long run, the
quantity theory can make better predictions of inflation in the long run.
• Indeed, most of the variation in inflation rates across decades in the United
States comes from variation in the rates of growth of the money supply.
• When looking across countries, it is also true that countries where the
money supply grew rapidly tended to have high inflation rates.
• Zimbabwe's inflation rate of 15 billion percent during 2008 is an example of
hyperinflation.
Hyperinflation A rate of inflation that exceeds 100% per year.
The Quantity Theory of Money: A First Look at the Link between Money and Prices
19. Figure 2.3
The Relationship between Money Growth and Inflation over Time
and around the World
Panel (a) shows that, by and large, in the United States the rate of inflation has been
highest during the decades in which the money supply has increased most rapidly.
Panel (b) shows that in countries where the growth rate of the money supply was low, the
rate of inflation was low, while in countries with high rates of growth of the money supply
had high rates of inflation.•
The Quantity Theory of Money: A First Look at the Link between Money and Prices
20. What Causes Hyperinflation?
• The equation of exchange explains how hyperinflation occurs. When both M
and V increase more rapidly than Y, the inflation rate must soar.
• Why does it occur? Because central banks are not always free to act
independently of the rest of the government.
• Governments that run budget deficits but can’t sell bonds to private investors
will often sell them to their central banks.
• In paying for the bonds, the central bank increases the country’s money
supply. This process is called monetizing the government’s debt, or, more
casually, funding government spending by printing money.
The Quantity Theory of Money: A First Look at the Link between Money and Prices
21. • During a hyperinflation, loans will be repaid in money that will have lost most
of its value.
• One of the most famous hyperinflations occurred in Germany during the early
1920s.
• The total number of marks—the German currency—in circulation rose from
115 million in January 1922 to 1.3 billion in January 1923 and then to 497
billion billion, or 497,000,000,000,000,000,000, in December 1923.
• The German price index rose to 126,160,000,000,000 in December 1923.
The German mark became worthless.
• Deutsche Bank would make loans only to borrowers who would repay them
in either foreign currencies or commodities.
Making the Connection
Deutsche Bank during the German Hyperinflation
The Quantity Theory of Money: A First Look at the Link between Money and Prices
22. Should Central Banks Be Independent?
• The more independent a central bank is of the rest of the government, the
more it can resist political pressures to increase the money supply, and the
lower the country’s inflation rate is likely to be.
• This result was proven in a study of 16 high-income countries (Figure 2.4).
• Critics of the Fed in Congress argue that the Fed’s independence violates
democratic principles, and that its actions exceed the authority granted under
federal law.
• But in 2010, the financial reform bill passed by Congress actually granted the
Fed even more authority.
• The Fed now regulates financial firms, and was also charged with ensuring
that there would not be another financial crisis of the magnitude of 2007–
2009.
The Quantity Theory of Money: A First Look at the Link between Money and Prices
23. Figure 2.4 The Relationship between Central Bank Independence and the Inflation Rate
For 16 high-income countries, the greater the degree of central bank independence, the
lower the inflation rate. Central bank independence is measured by an index ranging from 1
(minimum independence) to 4 (maximum independence).•
The Quantity Theory of Money: A First Look at the Link between Money and Prices
Editor's Notes
In panel (b), savings deposits include money market deposit accounts.
Checking account deposits are also called demand deposits.