Topic 01 : Money Flashcards
What is the double coincidence of wants?
The double coincidence of wants happens in a barter economy. Without a common medium of exchange (the USD), in order for an exchange to happen, both parties must desire something from the other.
I want to buy a table from you. And, all I have to offer is eggs. You only want wheat for your table. All else equal, we can not transact.
How many prices are there in a barter economy?
(n(n-1)/2)
What is wealth?
Wealth is the total collection of pieces of property that serve to store value.
What is income?
Income is the flow of earnings per unit of time. (a flow concept)
What are the functions of money?
- Medium of exchange
- Unit of account
- Store of value
What is meant by money is a “medium of exchange”?
A medium of exchange eliminates the trouble of finding a double coincidence of needs
- reduces transaction costs
- promotes specialization
What is required to create a medium of exchange?
- easily standardized
- widely accepted
- divisible
- easy to carry
- does not deteriorate quickly
What is meant by money is a “unit of account”?
- used to measure value in the economy
2. reduces transaction costs
What is meant by money is a “store of value”?
- used to save purchasing power over time (which other assets serve this function – such as gold)
- liquid
What are the types of payments systems?
- Commodity money – such as gold, silver, or even cigarettes
- Fiat Money – USD
- Checks – instruction to bank to transfer money
- Electronic Payment - VERY CHEAP, VERY FAST
- E-Money – debit card, smart card, cryptocurrencies
What is M0?
M0 is just currency
What is M1?
M1 is most liquid assets.
M1 = currency + traveler’s checks + demand deposits + other checkable deposits
What is M2?
M2 is M1 + not as liquid assets
M2 = M1 + small denomination time deposits + savings deposits and money market deposits + money market mutual fund shares
M3 and M4 exist, but they are not used as much.
What is the money measuring model (M1, M2, M3….) based upon?
The ways money is measured from M1 to M4 is based upon liquidity. As you go from M1 to M4, you include assets that are less and less liquid.
What is the difference between the fisher identity and the quantity theory of money?
The fisher identity makes no assumptions, while the quantity theory of money assumes that velocity (V) is constant and real GDP (Y) is at full employment level of output.
What is the fisher identity?
M x V = Y x P
M = money stock P = price level V = velocity Y = real GDP
What is the quantity theory of money?
M x V = Y x P
(assume V constant and full employment level of output for Y)
M = money stock P = price level V = velocity Y = real GDP
What is the relationship between M1 and M2 growth from 1960 - 2017?
While in the short term M1 and M2 move in different directions, in the long-term, they move in the same direction
Who holds most of the supply of USD?
- criminals
2. foreigners
What is Gresham’s Law?
“Bad money drives out good”
Gresham’s law states that people attribute more value to coins than metal of equal weight.
People prefer to trade in bad money and store value in good money. This causes good money to eventually not be used anymore.
English story about King printing new coins that had less silver in them, which made them less valuable compared to older ones. While the coins were the “same”, people separated old and new coins. They kept the old entirely silver ones and transacted with the less silver ones. The entire silver “good” coins
What is aggregate output?
Value of all final goods and services produced in a domestic economy during a year (GDP)
What is aggregate income?
Total income of factors of production (land, capital, labor) during the year
What is GDP deflator formula?
Nominal GDP / Real GDP
What is definitive money?
Definitive money is money that does not have to be converted into a more basic medium of exchange.
Examples:
- USD
- Gold
- Silver
Where does definitive money come from?
Definitive money is authorized by a central bank or government body as LEGAL TENDER
What is legal tender?
Legal tender is money that must be accepted to discharge debts and tax payments must be in cash or checks denominated in that money.
What is the fiat system?
The fiat system is where a central bank prints definitive money which can be used to pay debts and taxes.
What is M3?
M3 = M2 + large-denomination time deposits + institutional money market mutual fund balances + term repurchase agreements + Eurodollars
What is a Eurodollar?
A Eurodollar is a US dollar deposit held in Europe or somewhere outside the US
What is increased specialization due to money so important?
Specialization allows the economy to be more efficient.
Why is money better than both barter and government allocation?
Government’s often fail by misallocating resources.
Barter requires double coincidence of needs.
Money solves the problem by a facilitating trade, allocating resources efficiently, and avoiding the double coincidence of needs.
Money also allows for a deferment of payment.
