1、lecture 1 what is money1 meaning of moneyas the word money is used in everyday conversation, it can mean many things, but to economists, it has a very specific meaning. to avoid confusion, we must clarify how economists，use of the word money differs from conventional usageecono mists define money (a

2、lso referred to as the money supply) as anything that is generally accepted in payment for goods or services or in the repayment of debts currency, consisting of dollar bills and coins, clearly fits this definition and is one type of money. when most people talk about money, they're talking abou

3、t currency (paper money and coins) if, for example, someone comes up to you and says, "your money or your life,” you should quickly hand over all your cuitency rather than ask, “what exactly do you mean by "money5to define money merely as currency is much too narrow for economists. because

4、 checks are also accepted as payment for purchases, checking account deposits are considered money as well an even broader definition of money is often needed, because other items such as savings deposits can in effect function as money if they can be quickly and easily converted into currency or ch

5、ecking account deposits as you can see, there is no single, precise definition of money or the money supply, even for economists.to complicate matters further, the word money is frequently used synonymously with wealth when people say, "joe is rich一he has an awful lot of money,they probably mea

6、n that joe has not only a lot of currency and a high balance in his checking account but has also stocks, bonds, four cars, three houses, and a yacht. thus while "currency" is too narrow a definition of money, this other popular usage is much too broad economists make a distinction between

7、 money in the form of cuitcncy, demand deposits, and other items that arc used to make purchases and wealth, the total collection of pieces of property that serve to store value wealth includes not only money but also other assets such as bon ds, commo n stock, art, la nd、furniture, cars, and houses

8、.people also use the word money to describe what econo mists call income, as in the sentence “sheila would be a wonderful catch; she has a good job and earns a lot of money： income is a flow of earnings per unit of time money, by contrast, is a stock: it is a certain amount at a given point in time

9、if someone tells you that he has an income of $ 1,000, you cannot tell whether he earned a lot or a little without knowing whether this $1,000 is earned per year, per month, or even per day. but if someone tells you that she has $1,000 in her pocket, you know exactly how much this is.keep in mind th

10、at the money discussed in this lecture refers to anything that is generally accepted in payment for goods and services or in the repayment of debts and is distinct from income and wealth.2 functions of moneymoney performs three basic functions in an economy: (1) it serves as a unit of account; (2) i

11、t serves as a medium of exchange; and (3) it serves as a store of value.2.1 unit of accounta unit in terms of which a single price for each good and service can be quoted example: in the us, the price of an apple is given as dollars per apple, the price of a gallon of milk is given as dollars per ga

12、llon of milk, etc. that is, each good or service on sale at an outlet is generally offered at a single quoted "dollar price11 一 that is, a price quoted in terms of dollars.in reality, however, any particular good or service (e.g., apples) has a huge array of different prices that could be quote

13、d for it, one for each other good or service in the economy (e.g., pounds of bread per apple, cans of beer per apple, hours of doctor visits per apple, etc.)without a money unit to provide a single accepted unit of account, sellers would have to quote prices of items in terms of whichever goods or s

14、ervices they were willing to accept in return at the time the items were purchased2.2 medium of exchangean accepted means of payment for trade of goods and services as noted above, the existence of a money unit permits each item for sale to have a single price quoted for it in terms of the money uni

15、t but this is not enough to ensure the item will actually be sold to buyers for money units. sellers haveto be willing to accept the money units from buyers in return for giving up the item, which requires a trust on the part of sellers that others will in turn be willing to accept these money units

16、 from them at a later time in return for goods and services. that is, the money units have to act as a medium of exchange in the economy before one can conclude that they indeed constitute money in the economy.2.3 store of valuea repository of purchasing power for future use. money can be held for f

17、uture use, allowing for the ability to save (store value) over time all assets act as stores of value to some extent, but money by definition is the most liquid, i.e., the most easily converted into a medium of exchange, since by definition it already is a medium of exchange!on the other hand, money

18、 is by no means a risk-free store of value. the real purchasing power of money depends on the inflation rate, that is, on (he rate at which the general price level is changing .if the inflation rate is positive (prices are increasing), any money held loses purchasing power over time. if the inflatio

19、n rate is negative (prices are decreasing), any money held gains purchasing power over time.to the extent that the inflation rate is unpredictable, inflation reduces the ability of money to act as a reliable store of value and as a method of deferred payment in borrowing-lending transactions. a posi

20、tive inflation rate is bad for lenders and good for borrowers since the dollars lent out arc worth more than the dollars later paid back conversely, a negative inflation rate is good for lenders and bad for borrowersin extreme cases in which the inflation rate exceeds 50 percent per month a situatio

21、n referred to as hyperinflation - the entire monetary system generally breaks down and is replaced by barter. this has devastating effects on an economy post-wwi germany suffered a hyperinflation in which the inflation rate at times exceeded 1000 percent per month. more recently, various latin ameri

22、can economies experienced hyperinflations during the 1980s. for example, in the first half of 1985 bolivia's inflation rate was running at 20,000 percent and rising.3 evolution of the payments systemwe can obtain a better picture of the functions of money and the forms it has taken over time by

23、looking at the evolution of the payments system, the method of conducting transactions in the economy. the payments system has been evolving over centuries, and with it the form of money. at one point, precious metals such as gold were used as the principal means of payment and were the main form of

24、 money. later, paper assets such as checks and currency began to be used in the payments system and viewed as money where the payments system is heading has an important bearing on how money will be defined in the future.3>1 commodity moneyto obtain perspective on where the payments system is hea

25、ding, it is worth exploring how it has evolved for any object to function as money, it must be universally acceptable; everyone must be willing to take it in payment for goods and services. an object that clearly has value to everyone is a likely candidate to serve as money, and a natural choice is

26、a precious metal such as gold or silve匚 money made up of precious metals or another valuable commodity is called commodity money, and from ancient times until several hundred years ago, commodity money functioned as the medium of exchange in all but the most primitive societies. the problem with a p

27、ayments system based exclusively on precious metals is that such a form of money is very heavy and is hard to transport from one place to anothe匚 imagine the holes you'd wear in your pockets if you had to buy things only with coins! indeed, for large purchases such as a house, you'd have to

28、rent a truck to transport the money payment.3.2 fiat moneythe next development in the payments system was paper currency (pieces of paper that function as a medium of exchange). initially, paper currency carried a guarantee that it was convertible into coins or into a quantity of precious metal howe

29、ver, currency has evolved into fiat money, paper cuitcncy decreed by governments as legal tender (meaning that legally it must be accepted as payment for debts) but not convertible into coins or precious metal. paper currency has the advantage of being much lighter than coins or precious metal, but

30、it can be accepted as a medium of exchange only if there is some trust in the authorities who issue it and if printing has reached a sufficiently advancedstage that counterfeiting is extremely difficult because paper currency has evolved into a legal arrangement, countries can change the currency th

31、at they use at will. indeed, this is currently a hot topic of debate in europe, which has adopted a unified cuitencymajor drawbacks of paper currency and coins are that they are easily stolen and can be expensive to transport in large amounts because of their bulk to combat this problem, another ste

32、p in the evolution of the payments system occurred with the development of modern banking: the invention of checks4 measuring moneyas we will see, the quantity of money circulating in the economy, called the money stock, has a powerful influence on many economic variables. but before we consider why

33、 that is true, we need to ask a preliminary question: what is the quantity of money? in particular, suppose you were given the task of measuring how much money there is in the u.s. economy. what would you include in your measure?what would you include in your measure? the most obvious asset to inclu

34、de is cuitency一the paper bills and coins in the hands of the public currency is clearly the most widely accepted medium of exchange in our economy. there is no doubt that it is part of the money stock. yet currency is not the only asset that you can use to buy goods and services. many stores also ac

35、cept personal checks- wealth held in your checking account is almost as convenient for buying things as wealth held in your wallet. to measure the money stock, therefore, you might want to include demand deposits一balances in bank accounts that depositors can access on demand simply by writing a chec

36、k once you start to consider balances in checking accounts as part of the moneys tock, you are led to consider the large variety of other accounts that people hold at banks and other financial institutions. bank depositors usually cannot write checks against the balances in their savings accounts, b

37、ut they can easily transfer funds from savings into checking accounts in addition, depositors in money market mutual funds can often write checks against their balances. thus, these other accounts should plausibly be part of the u.s. money stock.4.1 the federal reserved monetary aggregatesthe federa

38、l reserve system (the fed), the central banking authority responsible for monetary policy in the united states, has conducted many studies on how to measure money. the problem of measuring money has recently become especially crucial because extensive financial innovation has produced new types of a

39、ssets that might properly belong in a measure of money since 1980, the fed has modified its measures of money several times and has settled on the following measures of the money supply, which are also referred to as monetary aggregatesml is defined as the sum of currency held by the public and tran

40、saction deposits at depository institutions (which are financial institutions that obtain their funds mainly through deposits from the public, such as commercial banks, savings and loan associations, savings banks, and credit unions). m2 is defined as ml plus savings deposits, small-denomination tim

41、e deposits (those issued in amounts of less than $100,000), and retail money market mutual fund shares.over some periods, measures of the money supply have exhibited fairly close relationships with important economic variables such as nominal gross domestic product (gdp) and the price level. based p

42、artly on these relationships, some economistsmilton friedman being the most famous examplehave cirgued that the money supply provides important information about the near-term course for the economy and determines the level of prices and inflation in the long run. central banks, including the federa

43、l reserve, have at limes used measures of the money supply as an important guide in the conduct of monetary policy.over recent decades, however, the relationships between various measures of the money supply and variables such as gdp growth and inflation in the united states have been quite unstable

44、. as a result, the importance of the money supply as a guide for the conduct of monetary policy in the united states has diminished over time. the federal open market coinmittee, the monetary policymaking body of the federal reserve system, still regularly reviews money supply data in conducting mon

45、etary policy, but money supply figures are just part of a wide array of financial and economic data that policymakers reviewlecture 2 inflationeconomists use the term inflation to describe a situation in which the general level of prices of goods and services in an economy is rising over a period of

46、 time. when the general price level rises, each unit of currency buys fewer goods and services. therefore, inflation reflects erosion in the purchasing power of money. to understand inflation, we must first examine how it is measured1 the consumer price indexsince inflation involves changes in the p

47、rice level, we have to find out how the price level is measured the most widely used measure of the price level is the consumer price index (cpi), an index that tracks monthly changes in the prices paid by consumers for a representative group of goods and services this representative group of goods

48、and services is called the market basket.now let's see how the cpi is computed the first step we have to take is to decide which goods and services we should include in the market basket. the cpi tracks only consumer prices; it excludes goods and services that are not directly purchased by consu

49、mers. there is slight difference among different countries in the selection of the market basket. for example, in the u.s., the market basket includes eight major categories of goods and services: food and beverages; housing; apparel; transportation; medical care; recreation; education and communica

50、tion; and other goods and services. in china, the market basket is also composed of eight main categories: food; tobacco and liquor; clothing; household facilities; health care and personal articles; transportation and communication; recreation, education and culture articles; residencethe second st

51、ep is to collect price information. most prices are obtained monthly by trained representatives of the statistics department, who make telephone calls or personal visits to housing units and retail establishments.the third step is to add up the prices to find the total cost of the market basket and

52、compare the current total cost with that of the base period - the time chosen as the basis of comparison for prices in other years. while almost any time can serve as the base period, currently the base period for the cpi in the u.s. is 1982-1984, and the practice in china is to use 2010 or the same

53、 month in the previous year as the base period.to calculate the cpi, we use the formula:cpi =xloocurrent cost of market basketcost of market basket in base periodfor example, if the cost of market basket in january 2011 is 167 yuan, and that in base period is 67, then the value of the cpi for januar

54、y 2011 is 249 (16%? x 100 = 249).the cpi is by far the most popular price index, however, the cpi is not a perfect measurement of inflation for it has its own weaknesses.the first problem is called substitution bias substitution bias occurs because prices of the goods and services in the market bask

55、et do not all change proportionate!y. some prices rise more than others. consumers respond to the change in relative prices by buying more of the goods whose prices have increased less. for example, if the price of pork rises faster than the price of beef, consumers tend to buy more beef and less po

56、rk. that is, consumers substitute toward goods that have become relatively less expensive. when substitution bias occurs, the cpi cant accurately predict the impact of the price increase on the consumer budget.the second problem with the cpi is the new product bias. new products are not introduced i

57、nto the market basket until they become commonplace items. this means that the substantial price decreases and quality increases that occur during the early years following introduction are not reflected in the ©pi.the third problem with the cpi is the quality bias. this bias arises because an

58、increase in the price may be due to an improvement in quality, rather than being a pure price increase for example, new models of televisions generally cost more than the versions they replace, but this improvement inquality is not measured by the cpi.2 other price indexesapart from cpi, there are s

59、ome other price indexes actually a price index can be constructed for any segment of the economy in exactly the same way as cpi.the producer price index (ppi) is a monthly measure of the average level of wholesale prices charged by domestic producers. prices are recorded when a producer sells its output to the very first buye匚 although ppi is compiled for all commodities, it is broken down into various subcategories, including farm products, fuels, chemicals, rubber, pulp and paper, and processed