4.2 + 4.3 econ

fisher formula

nominal interst rate (i)= real interest rate (r ) + inflation rate (pi)

lower than expected inflation

helps lenders and hurts borrowers

borrowers pay back more valuable money and higher real interest rates

barter system

trade goods for other goods

mutual coincidence of wants because both ppl need to want what the other person has which makes it difficult

function of money

medium of exchange: way to trade goods and services

unit of account: value is measured in dollars

store of value: maintains purchasing power over time but inflation decreases purchasing power

commodity money

something that has intrinsic value: gold

commodity backed

money backed up by a commodity that gives it value, backed up by gold

fiat money

has no intrinsic value, only has value because we give it value

monetary base

• bank reserves (funds banks have from the deposits of their customers)

• currency

m1

• currency

• checkable deposits

• savings depostis

m2

• all of m1

• near money ( money that is not currently available as a medium of exchange but can easily be turned into one)

  • time deposits and money market funds