February 13, 2013
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
-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:
-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
-confidence in the paper money, although there will not be
enough paper money to buy things, because there is a
restricted amount of gold.
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