functions and types: money Flashcards
wealth
to have money
income
to make money
what is the difference between wealth and money
asset rich, cash poor: have majority of your cash invested
store of value
purchasing power
medium of exchange
accepted at stores
medium of exchange
accepted at stores
unit of account
price donomination
standard of deferred payment
debt denomination
why does USD fulfills good SOV
because it is a good currency more short run
example of not good SOV
holding onto cash for long time
SOV requires money to not
deteriorate
what is most important money function
MOE
MOE typically requires money to be
easy to carry, divisible, and easily standardized
is USD widely accepted as a means of payment
-more so using electronic system than cards because modernizing
-ther nations will use USD as means of payment
UOA
since modern economies only have one UOA this function normally reveals which asset serves as money
SDP
where money value comes from
-can use these assets to pay your debts
which of the four functions of money is drecitly undermined by rapid rates of inflation
SOV
in what sense might such money turn into hot poatato
spend ASAP like hot potato
are there any other functions also undermined indirectly? in particular what might you expect to happen after a currency turns into a hot potato
if you are a business in this situation is you will start accepting any form of money (like other nations money with better value or bitcoin
the dollar (MOE) eliminates what and promotes what
elimainates double coincadence of wants transaction req and thus promotes specialization
doubke coincadence of wants
suppose peopple specialize even in absence of a common MOE (with skills and prefrences)
problem of double coincadnece of wants
multilateral problem
optimistic
makret that requires investment of time and place to trace (money makes it easier to just sell these goods)
when is an asset said to be money
if it serves as a SOV, MOE, UOA and SDP
whe is money said to be commodity money
if it assumes form of a physical commodity (eg gold)
when is money said to be fiat
if it is created artifically
fiat money is said to be what when it is exchangable for a physical commodity at a fixed exchnage rate (eg gold standard)
commodity backed
evolution from commodity to fiat
-for sake of trade (easier to use)
-natural evolution from gold ->cash
-worried because paper isgnifies how much gold so need chance to exchange it
what can govn’t do to alleviate concerns commodity backed fiat
they will issue insurance money to ppl who deposit money in banks. Banks can get checked by govn’t (to help ppl trust banks)
why might the govnt prefer fiat that is niether measured nor backed by gold
govnt wants to stop conversion of paper money -> gold because history shows that gold is finite paper isn’t (constraintst from commodity backed fiat made it collapse)
what is USD backed by
itself
dollars in real economy
-currency in circulation (FED does not issue currency to HH directly)
-bank deposits (+simialr)
dollars in banking system
-valut cash held by bank with Fed (physical equivalence)
-bank reserves (only nonbank with access to reserves is treasury)
bank deposit
electronic money banks have with federal reserve
only way for fed to make money
is in banking system
why are we not just counting currency in circulation when looking at aggreagtes
The different types of currency and exchange!!
rank varying monetary aggregates according to MOE function
most widely acceored is demand deposit (debit) because immediatley avilaable and little risk. If you dont have money and use debit card it will decline. drawback to demand depsoit is that there is typically a fee so might prefer cash because no fee (currency in circulation). 3rd is credit card (limit factor = because of high fees). 5th is vault cash. cant leave bank so it is unusable. 4th is checks because it can bounce if you dont have enough money
when is an asset said to be money
if it is SOV, MOE, UOA, SDP
following a positive permamnet shock to AS what happens to economy
downward price pressure
given it is a mandate to keep prices stable, what should the FEd do following depicted shock
lower interest rate: expansionary monetary policy
to avoid deflation money supply must
rise alongside RGDP
to reduce inflation money supply must
rise faster than RGDP
