Module 10

Money is organized into monetary aggregates based on its

liquidity

asset demand for money

mount of money people wish to hold as a store of wealth in preference to other kinds of financial assets. This demand for money depends on the interest rates available on other kinds of financial assets.

representative money

objects that have value because the holder can exchange them for something else of value ex: gold certificates and silver certificates used as currencies in the United States until 1933

Governments try to maintain the ___________ of the money stock by limiting the quantity of money they produce.

value; If money is limited, it retains its value.

fiat money

whatever the government declares to be money +is backed by trust in the government issuing it

Portability

easy to carry

Coins with a value less than the monetary value are

token money

A main function of money is to avoid the need for double coincidence of wants. What is the name of this function?

Medium of exchange function

What is money

Money is not income, wealth, loans, or productive resources *working definition: is something that people accept as payment for goods and services *economic definition: any financial asset that serves as a medium of exchange, a standard of value, and a store of wealth ~a medium of exchange

Which of the following is included in M2, but not in M1?

Savings deposits

Suppose you store part of your income in the form of money to be used 1 year from now. Which function of money are those dollars performing?

Store of wealth

Which of the following is not a motive for holding money?

Transactions demand Precautionary demand *Accumulation demand Asset demand

A Federal Reserve note is accepted as money by most Americans because

U.S. law establishes it as legal tender.

When interest rates rise, the transactions demand for money usually

decreases

According to the M1 definition, the money supply consists of currency held by the public, plus

demand deposits and traveler's checks.

True or false. If people doubt money's acceptability, then they will still using it as a medium of exchange.

false; If people doubt money's acceptability, they will not use it as a medium of exchange.

True or false. At lower interest rates, people will not be willing to hold larger cash balances.

false;When interest rates are lower, people will hold more cash balances.

During the Great Depression, the velocity of money

fell significantly

The U.S. currency that was first issued during the Civil War and not redeemable in gold was called

greenbacks

When money supply increases, interest rates are kept low. The direct effect of an increase in the money supply is to

increase aggregate demand, as people try to spend their excess money balances.

When the interest rate is low, a household might decide to borrow to buy a new car ______ consumption, which _______ aggregate demand, which leads to an ________ in output.

increases increases increase

Marshallian explanation of money demand

individuals decide how much money to hold in the same way they decide which goods and services to buy

If interest rates fall to a very low level, then

individuals will hold more money.

Transaction demand for money

is positively related to real income.

Scarcity

keeps the price level from rising too rapidly; governments try to maintain the scarcity of the money stock by limiting the quantity of money they produce.

The indirect effect of an increase in the money supply is to

lower interest rates, which stimulates both investment and consumption spending, thereby increasing aggregate demand.

Acceptability

money must be acceptable; people must be willing to take it in payment for goods and services

M2

money supply is equal to M1, plus small-time and savings deposits, money market accounts at banks and other financial institutions, and a few other specialized monetary assets.

Divisibility

possible to make change. Small denominations and coins are needed for this purpose.

Checkable deposits

principal component of the money supply, consist of balances in checking accounts at banks and other depository institutions

The M1 money supply includes

small-denomination time deposits. certificates of deposit. *checkable deposit accounts. money market accounts.

True or false. The ease with which an asset can be converted into the medium of exchange is called liquidity.

True

Money demand influencers

(1)the interest rate, which determines the demand for money as a store of wealth, (2) the level of income, which determines transactions demand (3) the price level and price expectations. Money demand is positively related to the level of money income

Motives for Holding Money

- convenient for market transactions - to store wealth.

liquidity

The ease with which an asset can be converted into cash

Shifts in Money Demand

-an increase in income will shift the demand curve to the right -Any change that leads people to demand more money (other than a change in the interest rate) will shift the money demand curve to the right, leading to an increase in the interest rate. -A decline in the level of income and output has the opposite effect, shifting the money demand to the left -As nominal income declines, the money demand curve will shift back to the left, reducing the impact of the original change in nominal income on the level of interest rates. -Similarly, a decline in nominal income leads to a fall in interest rates, which stimulates some spending and restores some of the initial decline.

functions of money

-medium of exchange to solve problem of double-coincidence of wants -standard of value ( a way to compare the costs, values, or prices of various goods ) +allows an economic link to the past and the future -store of wealth ( financial asset ): provides a general form of purchasing power that can be held in order to buy goods and services in the future

Durability

Ability of an item to last a long time Paper money is not extremely durable, but it is easy to replace. The average U.S. dollar bill has a useful lifetime of only about 16 months. Coins, in contrast, last about 20 years

The fact that money is legal tender increases its

Acceptability

How does M1 differ from M2?

All the items in M1 are used for transaction purposes, whereas all the items in M2 a are not.

Expected Price Level Changes and the Demand for Money

Changes in price expectations influence the demand for money because changes in the price level affect the purchasing power of money. When prices rise, a dollar buys less. When prices fall, it buys more. People will be concerned that a rising price level will cause their money holdings to decline in value.

Which of the following is a function performed by a modern society's money?

Double coincidence of wants Rate of return *Store of wealth Equivalent commodity

Which of the following characteristics of money is important for considering how well it will stand up under continued use?

Durability

An increase in interest rates, ceteris paribus, will cause the money demand curve to do which of the following?

It only causes a movement along the demand for money curve.

Money Supply & Money Demand

The money market, like any other market, will be in equilibrium when money demand is equal to money supply. The price of money is the interest rate. The money supply is largely independent of the level of interest rates (with qualifications to be discussed in later modules), so the money supply is drawn as a vertical line. Money demand is negatively related to interest rates. Equilibrium in the money market occurs at an interest rate

The standard of value function of money refers to money as

a method of measurement or comparison.

A banknote is

a promise entitling the bearer to an amount of gold on demand at the bank.

commodity money

a value in other uses equal to their monetary value ex: coins were made out of precious metal, and the stamp of the royal authority (often complete with a flattering profile) certified their value

wealth

as defined by Adam Smith in 1776 in his The Wealth of Nations—is "the annual produce of the land and labour of the society" *accumulation of resources; the total net worth of a person, household, or nation; or the total value of all assets owned minus the liabilities.

A document that entitles the bearer to an amount of gold on demand at the bank is a

banknote

The transactions demand for money depends on

both the price level and real income.

For an economy

the amount of money demanded for transactions is proportional to the aggregate volume of transactions, which is roughly equal to GDP (or P × Y).

If the market for money is in equilibrium, then

the demand for money must be equal to the supply of money.

M1

the money supply, has the greatest liquidity. It consists of coins, currency in non-bank hands, checkable deposits, and traveler's checks.

True or false. Changes in price expectations influence the demand for money because changes in the price level affect the purchasing power of money.

true

True or false. Experience suggests that a good candidate for serving as money should be somewhat scarce, portable, durable, divisible, and generally acceptable.

true

True or false. Lowering the interest rate to try and get businesses to invest more and people to borrow more money is a common way governments try to stimulate economic growth.

true

True or false. Checking accounts have many advantages over banknotes. For example, checking accounts are easier to protect from theft than cash, because you can stop payment on checks if your checkbook or checking account number is stolen.

true; Checking accounts have many advantages over banknotes. One benefit is that they make it easier to protect cash from theft through the use of a stop payment on checks, when your checkbook or checking account number is stolen.

True or false. The interest rate is determined where the money market is in equilibrium.

true;The price of money is the interest rate and that is determined where the money demand curve intersects the money supply curve.

token money

value as money is greater than the value of the metal they contain ex: coins