Class notes
Chapter 10– Money and Inflation
- Course
- ECON 205 (ECON205)
- Institution
- University Of Southern California
Describing money, inflation, price, interest, and economics models that summarize the concepts.
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ECON 205– Chapter 10Money and Inflation
- Money provides a foundation for the economy
- A smooth functioning economy means you barely notice the importance of
money
- Germany WWI: printed too much money and led to inflation
- Government control of money can break down too: 2001 Argentina
- Federal banks control the supply of money
- Why can’t we just print more money?
- Inflation
10.1) What is Money?
- Money: that part of a person’s wealth that can be used readily for transactions;
money also serves as a store of value and a unit of account.
- Money does not include what a person earns in a year or the total assets
that she has, but includes the portion of that person’s wealth that can be
used for transactions.
- Three Functions of Money:
- Medium of Exchange
- It is an item people accept as payment for what they sell
- People can use it to pay for other items too
- Coins used in ancient times, tech improvement over barter.
- Store of Value
- Money allows purchasing power to be carried from one period to
the next.
- You can sell food for money in September and use that money to
pay for clothes in January
- Unit of Account
- Money provides a standard unit in which prices can be set and
values of goods can be compared.
- Prices of goods are stated in a unit of money
- In Argentina, when inflation got his, prices were put in US dollars
(unit of account), pesos were still used to pay (medium of
exchange)
- Commodity Money
- Most common item used for money has been metallic coins. Other things,
like salt, cattle, furs, tobacco shells, etc have been used too
- When commodities are used as money, this is called commodity money.
- When gold, silver, and other goods were used as money, the change in
supply for these items would change their price relative to all goods.
, - Ex: increase in gold coins increases the number of gold coins that
people are willing to pay to purchase other stuff
- Economy prices would rise relative to that of the commodity. This is
INFLATION.
- The relationship between supply of money and inflation has persisted into
modern times.
- From Coins to Paper Money to Deposits
- Paper money is more efficient, replacing coins.
- Amount of paper money was linked by law or convention to the supply of
commodities, to prevent inflation.
- Many countries linked their paper money to gold: gold standard.
- Currency: money in its physical form (paper money and coin)
- Now no countries still use gold standard, all currency is supplied by the
government.
- Checking deposits: An account at a financial institution on which checks
can be written
- Deposits serve as money because people can write checks on them or
use a debit card to spend them.
- Cryptocurrencies:
- Cryptocurrency: an asset that can be transferred between two individuals
in a secure way not known to third parties.
- Digital, not physical
- Bitcoin, Ethereum, and Algorand are examples of cryptocurrency.
- Cryptocurrencies fluctuate greatly and are more volatile currencies.
- One idea to decrease the volatility of cryptocurrency is to automatically
adjust the supply of cryptocurrency as demand goes up and down.
- Another is to pay interest on cryptocurrency, with a computer regulating
how much interest is.
- Central banks are each considering issuing their own electronic currency;
want to have as much control over money as possible to limit inflation.
- Measures of the Money Supply
- Money Supply: the sum of currency and deposit at banks.
- The M1 Measure: currency plus checking deposits, including traveler
checks. All these items have a large degree of liquidity.
- Does not include a savings deposit or a time deposit.
- Narrowest Measure
- The M2 Measure: includes everything in M1, savings deposits, time
deposits, and accounts where check writing is limited.
- Savings deposit: deposit that pays interest and from which funds normally
can be withdrawn at any time.
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