Lecture notes Macroeconomics CHAPTER 4 The Monetary System: What It Is and How It Works ISBN: 9781319263904
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Economics
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University Of Reading (UoR)
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Macroeconomics
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MACROECONOMICS CHAPTER 4: The Monetary System: What It Is and How It Works
Macroeconomics 11th Edition By N. Gregory Mankiw
Monetary policy and fiscal policy Fiscal policy
● The government’s decisions about spending and
taxation
● Usually made by elected representatives
Monetary policy
● Decisions about the nation’s system of coin,
currency, and banking.
● Made by central banks
○ Which are typically set up by elected
representatives but allowed to operate
independently.
○ Central Banks have a major influence
over the world
, MACROECONOMICS CHAPTER 4: The Monetary System: What It Is and How It Works
Macroeconomics 11th Edition By N. Gregory Mankiw
What Is Money? A stock of assets
● That can be readily used to make transactions.
● That is made up by the currencies in the hands of
the public
The Functions of Money 1) A store of value
● Money→a way to transfer purchasing power
from the present to the future.
○ You can hold your money and trade it for
goods and services whenever
● Problems:
○ If prices rise, the amount you can buy with
any given quantity of money falls.
2) A unit of account
● Money→ provides the metric people use to
quote prices and record debts.
● Resources are allocated according to the prices
of goods relative to other goods, yet prices are
posted as amounts of a currency.
○ A car dealer says that a car costs
$40,000, not 800 shirts (though the two
may be equivalent)
3) A medium of exchange
● Money→ used to buy goods and services
● Money is the medium of exchange, so it is the
economy’s most liquid asset.
○ Asset liquidity→ The ease with which
an asset can be converted into the
medium of exchange and used to
buy other things
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