UGBA 10 Lecture Notes - Lecture 7: Openmarket, Transaction Account, Barter

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Lecture 7- 2/1/17
The functions of Money:
A medium of exchange
A store of value
Measure of worth
What is Money?
Money- object that is portable, divisible, durable and stable, and that serves as a medium of
exchange, a store of value, and a measure of worth
Barter: swap something for something (without using paper money, a medium of exchange)
(coincidence of wants)
Precursors: Leading to Money
Familial relationships ("gift economy" rather than exchange economy) little evidence for actual use
of barter
Tribal relationships
Debt or duty based relationships
Tally stick/beads or written records of debts (record may be denominated in cows or grain)
Precious metal money
M-1: The Spendable Money Supply
Can create money under control of federal reserve
FIAT
Concept of Money Supply: How much "money" (however defined) is in circulation
M-1: measure of the money supply that includes only the most liquid (spendable) forms of money
Currency (Cash): government-issued paper money and metal coins
Check: demand deposit order instructing a bank to pay a given sum to a specified payee
Checking Account (Demand Deposit) - bank account funds, owned by the depositor, that may
be withdrawn at any time by check or cash
M-2: M-1 Plus the Convertible Money Supply
Measure of the money supply that includes all the components of M-1 plus the forms of
money that can be easily converted into spendable forms
Included in M-2 but not M-1: the Convertible Money Supply
Time Deposit
Bank funds that have a fixed term of time to maturity and cannot e withdrawn earlier or
transferred by check
Money Market Mutual Fund
Fund of short-term, low-risk financial securities purchased with the pooled assets of investor-
owners
Reasons for Watching the Money Supply
The reason for tracking an investing the money supply is that excessive growth in the money supply
can lead to inflation
However, if the economy is producing less than capacity ("slack") this will tend to damp down
inflation as prices for goods and services cannot rise while there is oversupply
Example of Slack: The Labor Market
Unemployment rate at ~4% and increase in money supply
This is working against the inflation that we would expect to see
Suspect there is hidden slack in the economy, especially in the labor market
Decrease in the size of the work force
Unemployment has fallen since 2009, but there may still be hidden slack
Labor force participation ahs gone down
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