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Poli 243- Feb 13 Notes.doc

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Political Science
POLI 243
Mark Brawley

POLI 243 February 13, 2013 Lecture # TheFunctionsofMoney Money serves as: -A Medium of exchange -A Store of value( cant be a form of credit, if you sell goods, you can hold onto money) -A Unit of Measure( gives a comparison) Why money helps markets work.... (convert a system of goods and services into a medium of exchange) How is money provided? Government action: Legal Tender They can use authority to make the money work. Managing a money: -Confidence: -Convince people, that money is something or use and of value. Traditional fashion of doing this: make money out of something that was intrinsically desired. Although, problem is that people need to be willing not give it up for goods and services. -Liquidity: -confidence in the paper money, although there will not be enough paper money to buy things, because there is a restricted amount of gold. TheCentralBank’sRole:IssuingtheMoney Balancing confidence and liquidity Two prices for a money: -Two options for analyzing how value of money is changing. 1) Interest Rate(when interest rates go up stressing confidence) 2) Exchange Rate Mundell and Fleming each noted separately the tension here( a.k.a the “trilemma”). Two different markets for same item, domestic market and foreign market. What governments tried to do in late 40,50,60s was on the exchange rate keep things stable. Government wanted: -Fixed exchange rates: countries would promise to keep exchange rates the same. -Open capital controls -Domestic monetary policy autonomy: governments wanted to be able to manipulate their economies. Use monetary policy to manage domestic market. Mundell and Fleming discovered that you could not have all these three items. T
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