Give 4 frictions that make money essential?
- Lack of double coincidence of wants
- Limited commitment (no contracts)
- imperfect record keeping tech and enforcement
- Anonymity means can’t track borrowers
What are the 3 functions of money?
- Unit of account
- Store of value
- Medium of exchange
What is a unit account and why is it important?
- What goods/services are priced in terms of
- Otherwise would have to price goods in terms of each other, which gets very complex.
- it also helps to transmit economic info e.g. demand/inflation
What is a medium of exchange?
People hold it because they plan to swap for something in the future (not because of its inherent value)
Give 4 advantages of having a medium of exchange
- Avoids double coincidence of wants
- Reduces transaction costs
- Promotes specialization
- Overcomes infeasibility of IOUs
Give 7 characteristic of a good medium of exchange
Must be:
1) Easily standardized + verifiable
2) Widely accepted
3) Divisible
4) Not deteriorate quickly
5) Be scarce
6) Have price stability
7) Have transferability (easy to carry)
What is a store of value, and what must hold for a currency to be one?
Used to save purchasing power over time
-It has to retain value over time
What is the benefit of money being a store of value?
- It enables self-insurance against liquidity shakes
- allows consumption smoothing and provides protection against unexpected expenses.
Provide the logic behind co-existence
For multiple assets to co-exist, if perfect substitutes, must have save ROR.
-Therefore, if different RORs co-exist, must have different characteristics.
What 3 things determine the market value of a monetary unit?
1) intrinsic value
2) Promise of payment
3) Liquidity premium
Give the 6 characteristics of a liquid asset
1) Marketable - Readily + immediately accepted as payment by many
2) Predictable value
3) Reversible - Can get same value when selling immediately after buying
4) Divisible (eg not $1m painting)
5) Transportable (eg not $1m painting)
6) Verifiable/ recognizable
What is a system of scarce reserves?
Monetary policy implemented by changing supply of money
What is a system of abundant reserves?
Monetary policy implemented through interest rate paid on reserves.
