Topic 1: Money

Question 1

What is money?

Answer 1

Hicks “Money is defined by it’s functions”

We can consider what we would be lacking without money. The functions are:

1. Unit of account
2. Medium of exchange
3. Store of value

Question 2

How does money act as a unit of account?

Answer 2

1. Avoids unnecessary calculations
2. Permits rational economic calculations, like ordering of preferences
3. Transmits economics information
4. Is a unit of contract
5. It does change (inflate / deflate)

Question 3

Explain how money acts as a medium of exchange

Answer 3

1. Simplifies economic transactions (barter transactions get really fucking complex, due to the double coincidence of wants).
2. Replaces bilateral trading with multilateral trading, reducing the number of transactions needed to achieve agiven degree of specialization. Big time saver.
3. Increases the number of similar transactions, increasing competition.

Question 4

What is clovers cost of alternative trading model?

Answer 4

Because the minimum is being dragged down, it is not simply costs, but also time that is being reduced.

Question 5

Elaborate on moneys function as a store of value.

Answer 5

Can be considered a temporary abode of purchasing power - but in it’s most direct form.

For most assets, there is some degree of uncertainty as to how it will translate into goods and services. Not so for money, especially for stable currencies.

Keynes emphasises that it does not fluctuate with the rate of interest.

Is ready liquidated, and is the ultimate resource to avoid liquidity shortages.

Question 6

What is liquidity?

Answer 6

Can be considered

• Markletability
• Predictability
• Reversability
• Divisability

Question 7

What theories relate to the store of value function of money?

Answer 7

• Cambridge quantity theory
• Keynesian
• Friedman

Question 8

What is Keyne’s view on money?

Answer 8

• Unde theory of liquidity preference, the rate of interest is a monetary phenomenon
• Holding wealth as money gives flexibility
• Real economy adjusts to the rate of interest estabilshed by the monetary system
• Fluctuations on effective demand can be properly described as a monetary phenomenon
• Money is not neutral
• Money is integrated with the monetary economy
• Adjustment in the price of money (the interest rate) is an integral part of the economic process

Question 9

What are friedman’s views on money?

Answer 9

• Price of money is the inverse of the price level
• Monetary policy and change is considered with respect to the actual v. desired cash balances
• Price of money is an instititutional datum around which the rest of the economic system will adjust
• Money may not be neutral in the short run because of 1. rigidities in interest rate and prices, 2. mistaken expectations
• Changes in supply and demand for money influence interest rates and inflation in the short run, but in the long run real savings and investment will dominate.

Question 10

What is Lucas’s view on money?

Answer 10

Monetarism Mark II (1976)

Return to economic system of interdependence and strong microeconomic foundations.

Abstract modelling when expectations about the future are rationally held.

In that environment, policy ineffectiveness emerges as a key factor.