1 © ©1999 South-Western College Publishing PowerPoint Slides prepared by Ken Long Principles of Economics 2nd edition by Fred M Gottheil

2 Chapter 25 Money 11/16/2015 © ©1999 South-Western College Publishing

3 This chapter discusses principles associated with The Keynsian View of MoneyThe Classical View of Money © ©1999 South-Western College Publishing The Quantity Theory of MoneyThe Equation of Exchange Liquidity Gold-backed and Fiat MoneyThe Characteristics of Money Barter Exchange Monetarism

4 What is Barter? The exchange of one good for another, without the use of money © ©1999 South-Western College Publishing

5 When can Barter work? When people are basically self sufficient and there is a coincidence of wants © ©1999 South-Western College Publishing

6 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

7 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

8 What are the Properties of Money? It must be... durable portable divisible identical scarce © ©1999 South-Western College Publishing

9 What meets all of the requirements of money? GOLD © ©1999 South-Western College Publishing

10 What is Fiat Money? Paper money that is not backed by or convertible into any good © ©1999 South-Western College Publishing

11 What is an example of Fiat Money? Currency - coins & paper money © ©1999 South-Western College Publishing

12 What is Legal Tender? Anything that creditors are required to accept as payment for debts © ©1999 South-Western College Publishing

13 Does gold or silver back up our money? No, our money is not backed up by anything © ©1999 South-Western College Publishing

14 Why does Fiat Money have value? Because it is useful and relatively scarce © ©1999 South-Western College Publishing

15 What does the term Liquidity mean? The degree to which an asset can easily be exchanged for money © ©1999 South-Western College Publishing

16 Which form of money is most Liquid? It depends on the circumstances © ©1999 South-Western College Publishing

17 For a history of money: arian/llyfr.html © ©1999 South-Western College Publishing

18 What is our Money Supply? Typically, M1 money © ©1999 South-Western College Publishing

19 What is M1 Money? The supply of currency, demand deposits, and travelers checks © ©1999 South-Western College Publishing

20 What is M2 Money? M1 plus less-immediate forms of money, such as savings accounts, money market mutual funds and small- denomination time deposits © ©1999 South-Western College Publishing

21 What is M3 Money? M2 plus large-denomination time deposits and large- denomination repurchase agreements © ©1999 South-Western College Publishing

22 22 MI Checkable deposits Travelers checks Currency Money market accounts Savings deposits Small time deposits Miscellaneous moneys Large time deposits M2 M3 + + Measures of Money © ©1999 South-Western College Publishing

23 What is Near Money? Financial assets that can be converted into money such as savings bonds and corporate bonds © ©1999 South-Western College Publishing

24 Are Credit Cards Money? No! Because merchants expect to be paid by the credit card company © ©1999 South-Western College Publishing

25 For an insight of why credit cards are not money visit: © ©1999 South-Western College Publishing

26 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

27 27 © ©1999 South-Western College Publishing What is the Equation of Exchange? MV = PQ Prices Money QuantityVelocity

28 What is Velocity? The average number of times per year each dollar is used to transact an exchange © ©1999 South-Western College Publishing

29 Classical economists believe that the velocity and quantity of money are constant in short-run equilibrium © ©1999 South-Western College Publishing What is the Classical View of Money?

30 What do the Classical Economists do to the Equation of Exchange? It becomes the Quantity Theory of Money © ©1999 South-Western College Publishing

31 31 © ©1999 South-Western College Publishing What is the Quantity Theory of Money? P = MV Q

32 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

33 What is the Keynsian View of Money? They reject the idea that V is constant and that Q always reflects full- employment GDP © ©1999 South-Western College Publishing

34 How do the Keynsians view Velocity? Even though they agree that spending and saving are basically stable, velocity is also effected by expectations © ©1999 South-Western College Publishing

35 How do the Keynsians view the Equilibrium? They believe that the economy could tend toward a less than full- employment equilibrium © ©1999 South-Western College Publishing

36 According to the Classical Economist, why do people demand money? People demand money to make transactions © ©1999 South-Western College Publishing

37 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

38 According to the Keynsians, why do people demand money? Transactions motive Precautionary motive Speculative motive © ©1999 South-Western College Publishing

39 According to the Keynsians, how does money affect GDP? © ©1999 South-Western College Publishing An increase in the money supply increases GDP and not prices

40 S1S2 i1 Increase in money from S1 to S2 i2 M2M1 D 4040 © ©1999 South-Western College Publishing

41 i1 An increase in Investments i2 I2I1 I 4141 © ©1999 South-Western College Publishing

42 Aggregate Supply Curve AS AD1 AD2 AD3 AD4 AD5 P GDP 42 AD6 © ©1999 South-Western College Publishing

43 43 © ©1999 South-Western College Publishing oned/curric/money.html

44 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?

45 ENDEND © ©1999 South-Western College Publishing