Intermediate Macroeconomics Week 7
Intermediate Macroeconomics Week 7 ECON 2202
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This 2 page Class Notes was uploaded by Aaron Notetaker on Wednesday October 12, 2016. The Class Notes belongs to ECON 2202 at University of Connecticut taught by W. Pace in Fall 2016. Since its upload, it has received 18 views. For similar materials see Intermediate Macroeconomic Theory in Economics at University of Connecticut.
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Date Created: 10/12/16
Intermediate Macroeconomics Week 7 MONEY AND INFLATION Unusual forms of money: beads, tobacco, whiskey, stone wheels, cigarettes. Not quite barter system. Items actually used like money Money has 3 primary functions - Medium of exchange - Unit of account - Store of value Medium of exchange – without money, people would barter, which requires a ‘double coincidence of wants,’ i.e. you both have to want each other’s goods. Money promotes efficiency by minimizing transaction costs. Unit of account – a way of measure. Like using pounds or kilograms for weight. Store of value – saves purchasing power from the time income is received until the time it is spent. Money is also the most liquid asset. It can be immediately used to purchase goods and services. Money supply – the amount of money in the economy. Controlled by FED. 5 of the 12 bank presidents (on rotating basis) each have a vote in the FOMC (Federal Open Market Committee) Board of Governors - 7 members - HQ in D.C. - Each governor is appointed by the US president and confirmed by Senate - Chairman of the Board serves a 4 year, renewable term FOMC - Meets about 8 times a year - Makes decisions on market operations - Consists of the Board of Governors and the 5 rotating bank presidents (which always includes the president of the New York Federal Reserve) - Chairman of the Board of Governors presides as the FOMC chairman European Central Bank (ECB) is patterned and structured after the Fed Open market operations – how the Fed controls the money supply. Through purchases or sales of gov’t bonds. - When the Fed buys gov’t bonds, the money supply increases - When the Fed sells gov’t bonds, the money supply decreases Fed has 2 overall goals - Fight inflation - Allow steady GDP growth (stable employment) Fed monetary aggregates (total money supply) M1 - The Fed’s narrowest measure of money - Includes only the most liquid assets - Consists of currency, traveler’s checks, demand deposits, checking account deposits M2 - Consists of M1 plus money market deposit accounts, money market mutual fund shares with check-writing features, savings deposits, certificates of deposit in denominations of less than $100,000