Does Paper Money have any intrinsic value What is money then Why is it important If there was no money then we would have to barter For barter to work trade is said to require the double of coincidence of wants ID: 1027296
Download Presentation The PPT/PDF document "Money and Price Level Paper Money" is the property of its rightful owner. Permission is granted to download and print the materials on this web site for personal, non-commercial use only, and to display it on your personal computer provided you do not modify the materials and that you retain all copyright notices contained in the materials. By downloading content from our website, you accept the terms of this agreement.
1. Money and Price Level
2. Paper MoneyDoes Paper Money have any intrinsic value?What is money then?Why is it important?If there was no money then we would have to barterFor barter to work – trade is said to require the double of coincidence of wants.
3. The history of moneyMesopotamian civilization developed a large scale economy based on “Commodity money”Many other cultures also developed commodity moneyTobacco in America, Shells in India, Spices in Europe, Alcohol in New South WalesIf you were in prison, what would be good forms of money to smuggle in.
4. 3 important functions ofmoneyMedium of exchangeAnything that facilitates trade by being generally accepted by all parties in payment for goods and services. Unit of AccountA common unit for the measuring the value of every good and service.Store of ValueAnything that retains its purchasing power over time.
5. The characteristics of Commodity moneyDurablePortableDivisibleUniform QualityGresham’s law – people tend to horde good money and trade away the rest. Low opportunity costValue of money should not fluctuate erratically.
6. What is commodity moneyMoney that takes the form of a commodity with intrinsic valueIntrinsic means that the item would have value even if it was not used as money. Money without intrinsic value is known as Fiat Money
7. Too much money vs Too little moneyThe fall of the Soviet UnionThe ruble experienced hyper inflation. Value of the ruble fell dramaticallyRussians demanded other hard currencySanctions against PanamaThe Panamanians depended on the dollarThe US did not permit them to trade. People started hording dollars.Started taking money out of banks. Finally people resorted to barterPanama’s GDP as a result fell 30% in 1988
8. Why is inflation UnpopularHigher inflation means you have to spend more?When viewed from the income side –Higher inflation means You get paid moreYou get more for your factors of production. UNLESS PRODUCTIVITY INCREASES HIGHER WAGES MEAN HIGHER PRICESWho are hurt the most because of inflationIndividuals whose incomes are fixed in nominal terms – Pensions, EPF
9. Factors of InflationIncrease in the money supplyDecrease in the demand for moneyDecrease in aggregate supply of goods and services. Increase in aggregate demand for goods and services.
10. Cost push inflationBasically means that prices have been pushed up due to the increase in the 4 factors of production. Higher production costsCompanies cannot maintain profit marginsCosts are passed on to the consumerPrices riseRising Prices mean inflation has increased.
11. Demand pull inflationOccurs when there is an increase in aggregate demandWhen the four sectors of the economy increase their consumptionHouseholds, Government, Firms, Foreign buyersThey bid prices upIncreased prices = inflation.
12. Is inflation bad?Practically every economist will tell you that a little bit of inflation is a good thinga lot of inflation is a bad thingA little bit of inflation is like a tax on idle money. It prompts people to get their money out of the mattress (or low interest accounts) and put it to work on investments.A lot of inflation prompts people drives money out of economy-driving investments and into inflation-proofing investments (gold which does nothing for the economy). Deflation makes idle money profitable so no one, not the Fed or economists, wants to see deflation. If deflation was a risk today, you would see the Fed trying to fight it.
13. Thank you