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ECON 2030
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IMoneyaIt is a social process of obligations and fulfillment bIt is a highly liquid financial asset thats generally accepted in exchange for other goods is used as a reference in valuing other goods and can be stored as wealthcFive functionsiMeans of payment1Medium of exchange money is used to fulfill the obligations at the time of the transaction bilateral transaction money flowing in one direction while goods flow in the other direction2Means of unilateral payment paying a fine receiving a gift paying taxesiiUnit of account written record of transaction 1ie the transition to the Euro medium of exchange was national currency while the unit of account was Euro2it is how you related the value of one good or service relative to another something costswhile something else costsiiistandard of value how much a person is worthivstore of value money retains its value over the passage of time real value1the dollar has been losing value at the rate of inflation2this effect is not unique to money all assets gain or lose valuevstandard of deferred payment payment is made after time of the transaction1credit lending borrowingdif all of these functions are satisfied it is general purpose moneyeWhat gives Federal Reserve notes their valueiFaith in the governmentiiMoney doesnt have to have any inherent value to function as a medium of exchange All thats necessary is that everyone believes that other people will accept it in exchange for their goodsIIHow and why money is measuredaMoney as a medium of exchangeiM primary and most basic definition of money that is countable1iiCurrency and coin in circulation demand deposit account balances other checkable deposit account balances travelers checks1These are the most liquid assetsbMoney as a store of valueiLiquidity opportunity cost measurement of how easily one good or asset can be turned into another good or assetiiM M plus saving account balances small denomination time deposit 21balances CDs money marketing account balances nonindustrial money market mutual fund shares1Over 80 of money is privately owned by commercial banks not the governmentIIIHow do banks create moneyaMonetary BaseBank Reservescurrency in circulationiAll banks have banking reserve accounts at the FediiThe MB usually stays constant ie when you go to the ATM and withdraw cash currency in circulation increases while bank reserves decrease net change in Monetary base is 0bMultiple deposit creationiMoney SupplyMonetary BaseMoney MultiplierMBCiCBRMSMBMMAt home1001000Currency1001001Deposit1000100Checking 1001001
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