Transcript 1999 South-Western College Publishing

Principles of Economics
2nd edition
by Fred M Gottheil
PowerPoint Slides prepared by Ken Long
©1999 South-Western College Publishing
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Chapter 25
Money
4/6/2016
©1999 South-Western College Publishing
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This chapter discusses
principles associated with
Barter
Liquidity
Exchange
The
Gold-backed
The
The
Quantity
Characteristics
Keynsian
Classical
Equation
Monetarism
Theory
and
View
View
ofFiat
Exchange
of
of
of
ofMoney
Money
Money
Money
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What is Barter?
The exchange of one good
for another, without the
use of money
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When can Barter work?
When people are
basically self sufficient
and there is a
coincidence of wants
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What is a Double
Coincidence of wants?
A situation in which two
traders are willing to
exchange their
products directly
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What is Money?
Any commonly accepted
good that acts as a
medium of exchange, a
measure of value, and a
store of value
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What are the
Properties of Money?
It must be ...
• durable
• portable
• divisible
• identical
• scarce
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What meets all of the
requirements of money?
GOLD
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What is Fiat Money?
Paper money that is not
backed by or convertible
into any good
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What is an example of
Fiat Money?
Currency - coins
& paper money
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What is Legal Tender?
Anything that creditors
are required to accept
as payment for debts
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Does gold or silver
back up our money?
No, our money is not
backed up by anything
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Why does Fiat Money
have value?
Because it is useful
and relatively scarce
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What does the term
Liquidity mean?
The degree to which an
asset can easily be
exchanged for money
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Which form of money
is most Liquid?
It depends on the
circumstances
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For a history of money:
http://www.ex.ac.uk/~RDavies/
arian/llyfr.html
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What is our
Money Supply?
Typically, M1 money
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What is M1 Money?
The supply of currency,
demand deposits, and
travelers checks
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What is M2 Money?
M1 plus less-immediate forms
of money, such as savings
accounts, money market
mutual funds and smalldenomination time deposits
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What is M3 Money?
M2 plus large-denomination
time deposits and largedenomination repurchase
agreements
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• Large time deposits
M3
+
• Money market accounts
• Savings deposits
• Small time deposits
• Miscellaneous moneys
M2
+
• Checkable deposits
• Travelers checks
• Currency
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What is Near Money?
Financial assets that can
be converted into money
such as savings bonds
and corporate bonds
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Are Credit Cards Money?
No! Because merchants
expect to be paid by the
credit card company
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For an insight of why
credit cards are not
money visit:
http://www.mastercard.com
http://www.visa.com
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How does the Money
Supply effect prices?
The Equation of Exchange
relates the economy’s price
level, the quantity of goods,
and the money supply
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What is the
Equation of Exchange?
Money Velocity
Prices
Quantity
MV = PQ
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What is Velocity?
The average number of
times per year each
dollar is used to
transact an exchange
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What is the Classical
View of Money?
Classical economists
believe that the velocity
and quantity of money
are constant in short-run
equilibrium
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What do the Classical
Economists do to the
Equation of Exchange?
It becomes the
Quantity Theory of Money
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What is the
Quantity Theory of Money?
MV
P= Q
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What does the
Quantity Theory of Money
illustrate?
Money does not influence
how much we produce but
it does influence prices
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What is the Keynsian
View of Money?
They reject the idea that V
is constant and that Q
always reflects fullemployment GDP
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How do the Keynsians
view Velocity?
Even though they agree
that spending and saving
are basically stable,
velocity is also effected
by expectations
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How do the Keynsians
view the Equilibrium?
They believe that the
economy could tend
toward a less than fullemployment equilibrium
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According to the Classical
Economist, why do people
demand money?
People demand money to
make transactions
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What is the Transactions
Demand for Money?
The quantity of money
demanded by households
and businesses to transact
their buying and selling
of goods and services
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According to the
Keynsians, why do
people demand money?
• Transactions motive
• Precautionary motive
• Speculative motive
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According to the
Keynsians, how does
money affect GDP?
An increase in the
money supply increases
GDP and not prices
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Increase in money from S1 to S2
S1
S2
i1
i2
D
M1 M2
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0
An increase in Investments
i1
i2
I
I1 I2
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1
Aggregate Supply Curve
AS
P
AD6
AD5
AD4
AD3
AD1 AD2
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GDP
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http://www.frbatlanta.org/
http://woodrow.mpls.frb.fed.us/ec
oned/curric/money.html
http://www.treas.gov/
http://www.usmint.gov
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• What is Barter?
• What is Money?
•
•
•
•
•
•
•
What are the Properties of Money?
What is Fiat Money?
Why does Fiat Money have value?
What does the term Liquidity mean?
What is M1 Money?
What is the Classical View of Money?
What is the Keynsian View of Money?
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END
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