Chapter 11
© Dünhaupt, Dullien, Goodwin, Harris, Nelson, Roach, Torras
Learning Goals - After today‘s lecture, you will be able to:
- Describe the consequences of inflation and deflation.
- Describe the functions and types of money.
- Describe the measures of the money supply
- Explain how banks create money.
- Describe the categories and functions of nonbank financial institutions.
- Explain the concept of “speculative bubble” and illustrate it with concrete examples.
Chapter Outline Why Money? Why Money: Making Transactions Easier - Imagine there was no money:
- You would need to barter
- If you want to get a certain good which you don‘t have and want to exchange something else, you need to find someone who wants just the opposite exchange
- Sometimes, goods are not easily divisible (imagine you want to get some eggs, but only have a cow)
- Imagine you want to buy a house or make an investment, but do not have the means to do so
- You go to a bank and ask for a loan
- If the bank gives you a loan, you will buy the house
- If the bank does not give you a loan or conditions are too harsh, you will walk away not buying the house
- Hence, if the government can influence credit conditions, it can influence aggregate demand!
Some More Basic Thoughts About Money: - This, however, is only true if inflation is low to moderate
- In some cases, inflation becomes so high that money is not generally accepted anymore
- In these cases, people might resort to barter as money would lose value to quickly
- barter: exchange of goods, services, or assets directly for other goods, services, or assets, without the use of money.
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