Chapter 10 Notes FULL lecture notes for Chapter 10

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Published on 16 Oct 2011
School
University of Waterloo
Department
Economics
Course
ECON102
Page:
of 12
Econ 102 Chapter 10 Notes Prof: Angela Trimarchi
Chapter 10 - 1Money
“Money is the most important thing in the world"
George Bernard Shaw.
1Definition
Money is anything that is generally accepted as payment
for goods and services or as settlement of a debt
Barter
Definition:
Direct exchange of certain goods for other goods
Without money, exchange would take place by barter
Requires a double coincidence of wants
Is therefore costly and inefficient
Three Basic Functions of Money
1. Medium of Exchange
Money functions as a medium of exchange when it is used
to buy things
2. Unit of Account
Dollar is the yardstick for measuring the relative worth of a
wide variety of goods and services
A unit of account simplifies price comparisons:
Good Price in money units Price in units of another good
Rock Concert $32.00 4 movies
Movie $8.00 4 cappuccinos
Cappuccino $2.00 2 ice-cream cones
Ice-cream cone $1.00 4 local phone calls
Local phone call $0.25
3. Store of Value
Money and other valuables put away for future use
Liquidity
The ease with which a store of value can be converted into
a medium of exchange with little or no loss of value
Money is the most liquid of all assets
There is an old saying: “money is what money does”
In a general sense, whatever serves as a medium of
Econ 102 Chapter 10 Notes Prof: Angela Trimarchi
exchange is money
Commodity Money
Paper Money
Barter
Econ 102 Chapter 10 Notes Prof: Angela Trimarchi
Evolution of Money
Commodity money
Is an object in use as a medium of exchange, but which
also has a substantial value in alternative nonmonetary uses
Commodity money has ‘intrinsic value’
Examples:
Cattle, stones, candy bars, cigarettes, cacao beans
Gresham’s Law
“Bad money drives good money out of circulation”
Good money
oUndebased –face value equalled the value of the
commodity from which it was made
Bad money
oDebased –face value exceeded the value of the commodity
from which it was made
Ex of Gresham’s Law: POW camps WWII
Modern money consists of:
Paper money (Bank of Canada notes and cheques)
coins
No intrinsic value; fiat money
Definitions of the Money Supply
M1 =
Currency in circulation
+ Demand Deposits (checking accounts…)