Money, Interest, and Prices

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Chapter 11 Money, Interest, and Prices
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Before starting the lecture slides, these are the
answers to the first 12 questions on Midterm
2 1. C 2. A 3. A 4. D 5. E 6. Free (due to
my error) 7. E 8. E 9. B 10. C 11. C 12.
C. Answers to the first 10 questions on Homework
2 1. B, A or E, F, D, G. 2. F, T, F, F, T.
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What is Money? 1. Medium of exchange 2. Unit of
value 3. Store of value
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The Basic Types of Money 1. Commodity money 2.
Fiat money 3. Bank money
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Gresham's Law "Bad money drives out good." When
depreciated, mutilated, or debased currency is
circulated along with money of high value, the
good money will either disappear from cirulation
or cirulate at a premium.
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The money supply M1 Currency (paper money and
coins) plus demand deposits at commercial
banks. M2 M1 plus savings and small time
deposits.
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Bond prices and interest rates Recall our
discussion in the context of the stock
market. When a bond price rises your percentage
return, called the yield, with fall.
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The demand for money That is, why do we hold
money? 1. Transactions demand 2. Precautionary
demand 3. Speculative demand
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Liquidity preference "liquidity" is the
relative ease with which one can turn an asset
(e.g. a house) into money. it follows that money
is the most liquid asset. preferring liquidity
usually means to prefer to hold your assets in
the form of money so the "liquidity preference
curve" is essentially the same as the "money
demand curve"
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The equation of exchange MVPQ Classical
quantity theory assumed V constant. Modern
monetarists realize that V can change and we know
that it changed substantially as recently as the
early 1980s.
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