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GWU / Business / BADM 1004 / What happens if there is not enough money in the economy?

What happens if there is not enough money in the economy?

What happens if there is not enough money in the economy?


School: George Washington University
Department: Business
Course: Age of Globlization
Professor: Liesl riddle
Term: Winter 2016
Cost: 25
Name: Week 4 Notes
Description: These notes cover class lecture and recitation for September 19 and 21.
Uploaded: 09/21/2016
6 Pages 32 Views 5 Unlocks

September 19, 2016

What happens if there is not enough money in the economy?

Flows of Money  

∙ Economies don’t need money  

∙ However, money is useful

o Barter is hard  

o Search costs and transaction costs  find people who want what  you have but also have what you want

 Cost of making a transaction  really hard  

o Double coincidence of wants  

∙ Economic Organization of a POW Camp  

o Allied prisoners got the same rations

o Sikh prisoners didn’t want beef, French prisoners were desperate  for coffee  

o Cigarettes emerged as currency

∙ Uses of money  

o Medium of exchange  standard object, exchange goods and  services

What did they do in pow camps?

o Unit of account  standard unit, quoting prices

o Store of value  store wealth

∙ Money reduces transaction costs when it is:

o Divisible  

o Uniform  

o Storable  

o Compact  

∙ Gold and Silver worked well  they weren’t very useful for anything  else  

∙ First paper money  11th century in China  

o Bank notes carried a guarantee that it could be traded at any  time for coinage  

o Could be public or private  

∙ Invention of Finance  

o Money makes deals easier to strike  Don't forget about the age old question of What is the function of large intestine?

o Early states stored their treasure in temples  

What are the main uses of money?

 People began storing valuables in the temple, including  coins  

o Julius Caesar introduced the idea of allowing creditors to seize  land if payments weren’t made

∙ Not all lending relies on legal contract enforcement

∙ Fractional reserve banking system  Don't forget about the age old question of What is light microscopy used for?

o Banks take deposits in return for interest  

o Lend out the cash for more interest  

o Keep little cash in the vaults  reserves of cash are only a  fraction of their deposits

 Mostly electronic these days  

o Effects:  

 Banks make money on the “spread”

 Banks create money  

 Bank runs risk the economy  

∙ Bank run  

o Something causes depositors to worry about their deposits  o They storm the banks demanding to see their money  o Banks start to call in loans if they can  

 A healthy bank shuts down  

o Other people get scared  If you want to learn more check out What are the mature bone cells?

o Banking system shuts down  without credit, the real economy  follows  

 Credit drives up  can’t get loans anymore  

 Most of our wealth is tied up in the creation of money by  the financial system  If you want to learn more check out What happened in nat turner’s rebellion?

∙ Governments can stop bank runs  

o Alleviation  central banks can print money and lend it to banks  that are facing bank runs  

 Buying assets in return for a deposit  

 Stops banks from failing and keeps credit flowing  

o Prevention  Insurance and regulation  

 Insurance stops runs in their tracks  

 Regulation prevents “moral hazard”  

∙ International bank runs  

o Foreign investors more likely to panic  

 Less information  

 Don’t trust institutions  

 Deposit insurance systems are national  

 Exchange rate risk  

o Take their money, pulling deposits from banks and selling  securities  

o Sends prices crashing  contagion across countries  

∙ Crisis free, abundant credit countries  

o Half are small island or city states  We also discuss several other topics like What is the meaning of the individual level?

o Other half are democracies  

o All are former British colonies

∙ Non-democracies seem to be systematically less stable  ∙ Banking crises are not caused by unforeseen shocks  ∙ Bank bargains  

o Banks require governments  

o Governments can use banks  

 Finance state, government and their supporters

o Banks need to be sure that the government won’t turn against  them  

 Legal system assures the above, but policies can still  


o Governments and financiers make bargains  

 Bargains govern entry into finance, how credit is priced and who holds the bag when (or if) things go wrong  

o These bargains vary across countries and time  

∙ Takeaways  

o Finance is necessary for a modern economy  

o Finance is inherently risky  

o Finance is extremely difficult without the government  

 Provides property rights and can mitigate risk  

o Getting the balance right is extremely hard  

 Democracies generally do it but not all  

September 21, 2016 Don't forget about the age old question of What is the meaning of biotic?


∙ Midterm  Topics 1 through 6

∙ What works in one country does not work in others  

∙ Big three in economics  

o John Maynard Keynes  

o Adam Smith  

o Karl Marx  

∙ Developmental Economists  

o William Eastery  

 Tyranny of Experts  

 2014  over the last century, global poverty has largely  been viewed as a technical problem that merely requires  

the right “expert” solutions

 If you do X, Y and Z, you can fix global poverty  

∙ Then why hasn’t it been solved yet  

 Experts recommend solutions that fix immediate problems  ∙ Don’t address the systemic political factors that  

caused them  

 Produce an accidental collusion with “benevolent  


∙ Leaving dictators with more power to violate rights of

the poor

 Remedy extreme poverty  failed because they have  

neglected that individuals, businesses, governments and  

donors respond to incentives

 Failure of economic development is not the failure of  


∙ Failure to apply economic principles  

 Recommendation is to improve the institutions of  governments and international actors  

∙ Create incentives that promote growth

o Daron Acemoglu and James Robinson  

 Why Nations Fail  2012  

∙ “You need to go back 200 years, not 20 years to  understand”

∙ Key differentiator between countries is (good)  


 Good institutions  

∙ Laws and practices that motivate people to work  hard, become economically productive  

 Narrow focus on inclusive institutions  

∙ Ignore certain things  

o Area’s being landlocked  harder to trade  

o Environmental damage  

o Tropical diseases  

o Tropical agricultural productivity

o Jeffery Sachs  

 Earth Institute  

 Topography  decides whether you can make it or not   “I have assumed that America... would reliably find its way  to social betterment.”

 We need a new economic paradigm  

 Changed gears and devoted himself to looking at economic problems in the US  

 End of Poverty  clear conceptual map of the world  economy  

∙ Explains why, over the past 200 years, wealth has  diverged across the planet  

o Why the poorest nations have so far been  

unable to improve

o Thomas Friedman  

 Books

∙ Hot, and Crowded  

∙ The World is Flat  

 Talks about the US  something really wrong is going on  here  

 How to renew the US  

 Global Warming and rapidly growing populations and the  astonishing expansion of the world’s middle class through  globalization  

∙ Have produced a planet that is hot, flat and crowded

 Earth is dangerously unstable  green revolution we need  is like no revolution the world has seen  

o Paul Collier  

 The Bottom Billion  

∙ Shows what is happening to the poorest people in  

the world  

∙ Offers ideas for opening up opportunities for all  

 Why the differences?  central question  

 Norway is 496 times richer than Burundi  

∙ Average per capita income: Norway $84,290 and  

Burundi $170

 Power, prosperity and poverty vary greatly around the  world

 Hot-Cold climate theory  politically incorrect today  

∙ People in hot places work less than those in cold  


o Jared Diamond  

 Guns, Germs and Steel  

 Attributed the success of a state’s economic development  (or lack thereof, to characteristics of its physical  


 Geography is an important determinant  

 Geography theory  

∙ Farming and governments  

∙ The curse of natural resources  

∙ Cold versus Hot Climate  impacts rate of diseases  

and agricultural productivity  

∙ Natural environment

o Max Weber

 Reasons why some countries and regions of the world  experienced near miraculous periods of explosive growth  while the rest of the world stagnated  

∙ Multi-disciplinary approach is necessary  

∙ Cliometric theory  

o Emphasis on developing a coherent and  

consistent theoretical model that will provide  

the basis for interpreting historical economic  

and social phenomena

∙ What makes countries rich or poor?

o No simple answer, depends on so many things  

o Inheritance, education, ambition, talent, health, personal  connection, etc.  

o Also depends on how you define health  

∙ The IMF

o Creation after WWII  

 Manage the world’s exchange rate system

 Global financial system of currencies  

o Since 1976, we are in a volatile exchange rate system   IMF had to reinvent itself  

o Lender of last resort when you run out of real money   IMF grabs the reigns of economic power of a country when  they are called in  

 Badge of shame  means that the government has failed

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