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Concepts of Money
Fiat money has value due to government fiat, rather than through intrinsic value.
Commodity money, such as gold and silver coins, which do have intrinsic value.
High-powered money, which adds the deposits held by banks and other depository institutions
At the Federal Reserve. Another name for high-powered money is the ary base.
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Concepts of Money
ary aggregate
A ary aggregate is the total dollar stock of a group of financial assets defined to be money. The mon definition, called M1
Checkable deposits issued by banks and other financial institutions.
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Concepts of Money
ary aggregate
M2 includes household holdings of savings deposits, small-time deposits, and retail money-market mutual funds.
The M2 definition goes beyond the concept of money as a medium of exchange.
In our model, it is best to use a narrower definition of money, for example, as currency held by the public.
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The Demand for Money
Money is hand-to-hand currency
Assume that the interest rate paid on money is zero.
Bonds and ownership of capital
Interest-bearing assets
These assets pay a positive return to the holder.
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The Demand for Money
The household budget constraint in nominal terms
PC + ∆B + P·∆K = π+ wL + i · ( B+ PK)
nominal consumption + nominal saving = nominal e
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The Demand for Money
“demand for money,” Md,
The average holding of money that results from the household’s optimal strategy for money management.
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The Demand for Money
The Interest Rate and the Demand for Money
A higher interest rate, i, provides a greater incentive to hold down average holdings of money, M, in order to raise average holdings of interest-bearing assets, B + PK. That is, with a higher i, households are more willing to incur transaction costs in order to reduce M
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