money Flashcards
functions of money (3)
- medium of exchange
- store of value
- unit of account
a medium of exchange
exchanging 2 items is hard, accepting a common currency is easier
store of value
converting perishable goods to durable goods this allows saving for the future
unit of account
standard relationship between various goods in an economy.
intrinsic value
market value of currency’s constituent material when used for non-monetary purposes.
extrinsic value
official value doesn’t change. 1 is always 1
fiat money
low intrinsic value, high exchange value
exchange value
what you can buy with it
commodity money
high intrinsic value, high exchange value
inflation
increase in the general price level
zero inflation
constant price level from year to year
deflation
a decrease in the general price level
disinflation
a decrease in the rate of inflation
what’s wrong with inflation?
- for people who are on a fixed nominal income, it means lower real income
- introduces uncertainty
- menu costs
- discourages investment
what’s wrong with deflation?
when prices are falling, we postpone consumption thinking it’s gonna be cheaper in the future
increases real debt burden
where does inflation come from? (3)
- money supply
- demand pull
- cost push (supply)
money supply
printing money, more money chasing same goods
demand pull inflation
aggregate demand > aggregate supply (after covid overconsumption)
cost push (supply side)
supply is less - cutting off energy supplies, decreasing raw materials
what do central bank’s do?
they target price stability by changing interest rates and money supply.
higher interest rate means…
lower spending today
lower interest rate means…
more spending today
phillips curve
if you want to have low unemployment, there should be inflation (assumes that tradeoff exists between inflation and unemployment)
