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Principles of Economics 2nd edition by Fred M Gottheil PowerPoint Slides prepared by Ken Long ©1999 South-Western College Publishing 1 Chapter 25 Money 5/23/2017 ©1999 South-Western College Publishing 2 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 ©1999 South-Western College Publishing 3 What is Barter? The exchange of one good for another, without the use of money ©1999 South-Western College Publishing 4 When can Barter work? When people are basically self sufficient and there is a coincidence of wants ©1999 South-Western College Publishing 5 What is a Double Coincidence of wants? A situation in which two traders are willing to exchange their products directly ©1999 South-Western College Publishing 6 What is Money? Any commonly accepted good that acts as a medium of exchange, a measure of value, and a store of value ©1999 South-Western College Publishing 7 What are the Properties of Money? It must be ... • durable • portable • divisible • identical • scarce ©1999 South-Western College Publishing 8 What good fulfills all of the requirements of money? GOLD ©1999 South-Western College Publishing 9 What is Fiat Money? Paper money that is not backed by or convertible into any good ©1999 South-Western College Publishing 10 Why does Fiat Money have value? Because it is useful and relatively scarce ©1999 South-Western College Publishing 11 What does the term Liquidity mean? The degree to which an asset can easily serve as money ©1999 South-Western College Publishing 12 For a history of money: http://www.ex.ac.uk/~RDavies/ arian/llyfr.html ©1999 South-Western College Publishing 13 What is considered to be our Money Supply? Typically, M1 money ©1999 South-Western College Publishing 14 What is M1 Money? The supply of currency, demand deposits, and travelers checks ©1999 South-Western College Publishing 15 What is M2 Money? M1 plus less-immediate forms of money, such as savings accounts, money market mutual funds and smalldenomination time deposits ©1999 South-Western College Publishing 16 What is M3 Money? M2 plus large-denomination time deposits and largedenomination repurchase agreements ©1999 South-Western College Publishing 17 • Large time deposits M3 + • Money market accounts • Savings deposits • Small time deposits • Miscellaneous moneys M2 + • Checkable deposits • Travelers checks • Currency ©1999 South-Western College Publishing MI 1 18 8 What is Near Money? Financial assets that can be converted into money such as savings bonds and corporate bonds ©1999 South-Western College Publishing 19 Are Credit Cards Money? No! Because they simply represent checking accounts which is M1 money ©1999 South-Western College Publishing 20 For an insight of why credit cards are not money visit: http://www.mastercard.com http://www.visa.com ©1999 South-Western College Publishing 21 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 ©1999 South-Western College Publishing 22 What is the Equation of Exchange? Money Velocity Prices Quantity MV = PQ ©1999 South-Western College Publishing 2 23 3 What is Velocity? The average number of times per year each dollar is used to transact an exchange ©1999 South-Western College Publishing 24 What is the Classical View of Money? Classical economists believe that the velocity and quantity of money are constant in the short-run. ©1999 South-Western College Publishing 25 What is the Quantity Theory of Money? MV P= Q ©1999 South-Western College Publishing 2 26 6 What does the Quantity Theory of Money illustrate? Money does not influence how much we produce but it does influence prices ©1999 South-Western College Publishing 27 What is the Keynesian View of Money? They reject the idea that V is constant and that Q always reflects fullemployment GDP ©1999 South-Western College Publishing 28 How do the Keynesians view Velocity? Even though they agree that spending and saving are basically stable, velocity is also effected by expectations ©1999 South-Western College Publishing 29 How do the Keynesians view the Equilibrium? They believe that the economy could tend toward a less than fullemployment equilibrium ©1999 South-Western College Publishing 30 According to the Classical Economist, why do people demand money? People demand money to make transactions ©1999 South-Western College Publishing 31 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 ©1999 South-Western College Publishing 32 According to the Keynesians, why do people demand money? • Transactions motive • Precautionary motive • Speculative motive ©1999 South-Western College Publishing 33 According to the Keynesians, how does money affect GDP? An increase in the money supply increases GDP and not prices ©1999 South-Western College Publishing 34 Increase in money from S1 to S2 S1 S2 i1 i2 D M1 M2 ©1999 South-Western College Publishing 335 5 An increase in Investments i1 i2 I I1 I2 ©1999 South-Western College Publishing 336 6 Aggregate Supply Curve AS AD2 AD1 Real GDP ©1999 South-Western College Publishing 37 37 http://www.frbatlanta.org/ http://woodrow.mpls.frb.fed.us/ec oned/curric/money.html http://www.treas.gov/ http://www.usmint.gov ©1999 South-Western College Publishing 3 38 8 • 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? 39 END ©1999 South-Western College Publishing 40