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Lecture 9

PM Lecture 9 Money II

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Department
Economics
Course
CAS EC 102
Professor
Jay Zagorsky
Semester
Spring

Description
PM Lecture #9: Money II Thursday, April 10, 2014 10:01 PM Lecture Overview - Measuring Money - Why Do People Hold Money? - Where is the Money? - Famous Economist:F. A. Hayek - Infamous Person: Huntington Hartford - If Time Ted Movie Why is Measuring Important? - Chapter 16 discusses what causes inflation/deflation;key point is amount of money influences inflation/deflation ○ Measuring amount of money helps us predict and control inflation/deflation - Spending is based on amount of money individuals and businesses have Measuring Money - There are different types of money based on liquidity ○ Liquidity is the ease with which an asset can be convertedinto cash, without losing value, and spent - Gov't tracks three measures ○ M1: Most liquid  Consists of: □ Currency (paper bills and coins) 49% □ Demand deposits (checking accounts) 51% □ Travelers checks $4 billion  Total value: □ $2.7 trillion in Feb 2014 □ $2.5 trillion in Feb 2013  8% growth ○ M2: Moderatelyliquid  Consists of the M1 category + □ Money marketfunds □ Saving deposits □ Small CD's (less than $100,000)  Total value: □ $11.1 trillion in Feb 2014  7% growth ○ M3: Least liquid (no longer used in US)  Consists of the M2 category + □ Large CD's (more than $100,000) □ Reverse purchase agreements □ Eurodollars  Total value (US) □ $10.3 trillion in Feb 2006 □ From Feb 2005 to Feb 2006,grew 8.4% □ Series ended in Feb 2006,but still used in Germany and EU ○ World Bank Information  World Bank provides fata of Stock of Money and Stock of Quasi-Money in WDI. What are these? □ Stock of Money is M1  Currency and demand deposits/checkingaccounts □ Stock of Quasi-Money is M2 minus M1 Savings and time deposits held in a country's bank  Savings and time deposits held in a country's bank ○ CIA  CIA Factbookprovide data on narrow money and broad money. What are these? □ Narrow money is M1  Currency and demand deposits/checkingaccounts □ Broad money is M3  All various forms of cash and deposits held in a country's banks Why Do People Hold Money? - Problem:Money pays no interest. Could be holding a bond instead of money and earning interest ○ Transactions motive  You cannot spend bonds, CDs and stocks and credit cards are not accepted everywhere ○ Speculative motive  Sometimesholding cash is profitable □ Key idea: Bond prices are inverselyrelated to interest rates  If interest rates rise, bonds will worth less ○ Precautionarymotive  Sometimes,having cash available to pay for emergenciesis very helpful Where is the Money? - The Boston Fed does a survey of consumer payment choice ○ $69 cash on each person (transaction movie) ○ $229 cash at home/stored(precautionary motive) ○ Similar numbers in Australia and Canada, but people in Germany and Austria hold about 2 times as much cash - Where is all the currency? ○ In Feb 2014,there was $1.1 trillion of US currency outstanding ○ There are about 310 million people living in the US  1.1
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