ECON282 Lecture Notes - Lecture 4: Open Market Operation, Monetary Base, Money Multiplier

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23 Jul 2016
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Chapter 4 Lecture notes – Understanding Money and Inflation
Classical Dichotomy – in the long run nominal variables do not affect real variables
oMoney supply or inflation wouldn’t affect unemployment, real GDP or real wages in the
long run
o#MoneyNeutrality
oMoney supply doesn’t matter in the long run
oYou cannot increase the real GDP, standard of living etc. in the long run by just
increasing the money supply
oBut you can change these stuff in the short run
Types of Money
oLow transaction costs – led to the development of money
oBarter – double coincidence of wants
oMoney – allows specialization – high standard of living
oCommodity money and fiat money
Money functions
oMedium of exchange
oUnit of Account
oStore of Value
Money decreases discrimination compared to barter – because you end
up selling your good based on getting money back regardless of who
you are trading with
Measuring Money Supply
oM1+
Most liquid
oM2+
Non personal bank deposits – government, business and organizations money
Not that liquid
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