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ECON 2030 Exam 4 (got 96%)

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ECON 2030
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ECON 2030FINAL EXAMLectureNovember 14 2012A Money The Basics1 Definitions2 Five Functions a Means of Paymenti Medium of Exchangeii Means of Unilateral Payment b Unit of Account c Standard of Valued Store of Valuee Standard of Deferred Payment 3 What gives Federal Reserve Notes their valueB Money How and why is it Measured 1 Money as a Medium of Exchange a M12 Money as a Store Value a M2C Money How do banks create it1 Model Money SupplyMB x Money Multiplier a MBMonetary BaseBank ReservesCurrency in Circulation2 Multiple Deposit Creation A Fairy Tale3 Conclusions a More Deposits More Loans Greater Money Supply b Fewer Deposits Fewer Loans Lower Money Supply Recall economics study of how we provision ourselves with means of existence goods and services are exchanged for money We discussed prices determination of prices in a market interaction of buyers and sellers productivity of firms inflation aggregate price level etc Assuming we knew what money was but really we are cluelessWe are going to introduce monetary policy Chapter 3031 with side look to exchange rates and fiscal policy chapter 34Before going into details of monetary policy we need to talk about money in both qualitative and quantitative means Money is major part of our culture amazing how little people know about it what people do know is usually wrong and very misguided and can be fed all sorts of bologna What is money Where does it come from What does money do What role does it play in society It has value Problem Do not use a lot of cash anymore Most of money used today has no physical formCreated by private sector NOT by government We need to identify money by the functions it performs Typical DefinitionMoney anything generally used for payment of goodsservices generally functions as medium of exchange Problem The assumption of definition says that money is anything used generally in market exchange of goodsservices problem is that money is prerequisite for market system of economy circular narrow EX WW2 POW camps for allied troops no money existed in those societies What ended up happening is troops introduced money in cigarettes Economists have used this to come to conclusion human nature to do when no money is present This illustrates incredible ignorance of societies of history and cultures of economists Correct conclusion to draw is when people are taken out of society and culture that they are used to and put into unfamiliar setting they try to replicate social organization in which they are familiar Prisoners came from monetized societies and recreated that which they knew money If they didnt know of money in society they wouldnt create it Better Definition Money a social process of obligation and fulfillment key word is a In our lives we have many obligations in relationships and interactions only some of which we fulfill through use of money it is those patterns of behavior that we want to focus onDefining money is not issue but IDENTIFYING function in social process Functions of Money1ECON 2030FINAL EXAM1 Means of Paymenta Medium of Exchange b Means of Unilateral Payment Money is a way of making payments two types bilateral and unilateralWhen money is used to fulfill obligations to pay for goodsservices at time of transaction they money is performing medium of exchange example swapping pizza for 20 at the same time Bilateral Transaction goodservice in one direction and money in the other at the same timeEX Pizza delivery comes in order to get pizza must fulfill obligation to pay in order to receive pizzaUnilateral Transaction flow in one direction money flowing and NO goodservice flowing in other direction EX Grandmother gives birthday card with money EX Parking ticket fines You have obligation to pay ticket Fulfill by paying a fine by draft electronic transfer etc EX Most commonTax Payments money from individuals to government with no good service flowing in other direction in same transaction Fill out tax income return which we are obligated to do Dollars flowing from me to state with no gs returned What about roads built from tax money Those are other transactions They pool funds together and engage in bilateral transactions They hire contractor to build new road and pay with funding from taxes This is medium of exchange goodsservices in exchange for money in same transaction NOT unilateralseparate transaction 2 Unit of Account Accounting written record of transactions whether it is on paper tablets or receipt at grocery the written record of transaction is not listed in cans of tomato soupCredit card bill each month Total of all goodsservices purchased in a period of time expressed in dollars and cents Written record of transaction is made and units of which it is expressed in dollars that is money performing function of unit of account3 Standard of Value Standard is way of measuring measure value in our society figuratively and literally is in terms of moneyWhat is that sharpie worth I can draw get high etc but money value is 079Richest person is world owns stock realestate etc In terms of value we put it in terms of dollars Not everything can be expressed in terms of dollar Example GrandmotherA penny for your thoughts MasterCard used it successfully in advertising campaign Dinner for two 100 Loving couple PricelessThinking about value of things mental construct4 Store of Value Stores to keep Implies passage of time holding onto value over time EXAMPLE Life insurance policy that I sink funds into each month those funds are store of value holding over timeProblem All assets not just money serve as a store of valueIs a 20 bill good store of value This is a normative question AnswerNO why not It depends Example House today compared to a decade agoExample 20 dollars today is different from 20 a decade ago Is bill a good store value compared to other money assets such as a hamster YESyou cant pay for groceries with a hamster In US do you find a lot of people storing value in hamsters or dollars DOLLARS Countries with unpredictable and high rates of inflationcurrencies value is not predictable 5 Standard of Deferred Payment Money can function as standard way of measuring of deferred to put off paymentWhen we pay for goodservice AFTER time of transactionthen it functions as standard of deferred paymentCREDITCredit Borrowing and Lending Student Loan Education now but pay for it over many years in future incurred a debt Express debt in terms of thousands of dollars not as 120 hours of credit in college In US dollar serves all of those functionsGeneral Purpose money used for lots of things Other countries do not use money in same concept as we do It is intimately tied to place time where it is being usedWhat gives Federal Reserve notes their valueIn other words when 20 is on ground unattended and you pick it up you do so because it has valueWhat gives it that value This note is legal tender for all debts public and private Stated on all bills government says so All debts public means debts to government taxes etc If you couldnt do anything else with this government will still accept the US bill as form of payment not pigs pencils etcGovernment promises that it is a function of unilateral payment2
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