ECON 2040

Unit #3: Macroeconomics (2/4)

Money

What is Macroeconomics?

  • The part of Economics dealing with large-scale economic issues/ the economy as a whole

Modern Economies needs Three Things to be Successful:

  1. The Rule of Law

  2. Sound/Well thought out money

  3. A banking system

What is Money?

  • Store of value

    • Something that has value no matter what

    • Means of exchange

      • More than just bartering

    • Unit of account

      • You know what it means, is it a good deal or not?

The Three types of Money

  1. Commodity Money

    • Has value in and of itself, things like gold and silver have value

  2. Representative Money

    • Represents something of value, one dollar represents x amount of silver

  3. Fiat Money

    • It has value because the government says it does

      • M1: The total supply of fiat money in an economy on hand, and in checking accounts

      • Currency: Synonym for “money”, “bills” and “Notes”

How do banks make money?

  • By taking money that has been deposited and loan it out with interest

    • Interest is expressed as a percentage

    • Fractional Reserve Banking: Banks loan out most of the deposited money

      • Banks CANNOT return all deposited money on demand

      • FDIC now insures deposits: Federal Department of Insurared Currency

Inflation

What is inflation?

  • A rise in prices which results in money having less purchasing power

How is Inflation Measured?

  • The CPI: Consumer Price Index

    • Measures inflation through a “basket of goods”

      • Prices of… cereal, milk, coffee, furniture, rent, medical expenses

Inflation Rate:

  • Increase in the price level of goods and services

Deflation Rate:

  • Decrease in the price level of goods and services

What causes inflation?

  • Increase in the supply of money

    • “Inflation is a monetary phenomenon”- Milton Friedman

    • More money is printed/created by the government

How Can the Government Print More Money?

  • No gold standard

    • Gold was used as money OR paper money was tied to gold

      • Representative money

      • Nixon 1970s

    • OR when the aggregate demand of “all consumers” for goods and services in an economy rises faster

Why is Inflation Bad?

  • It makes people poorer

    • It erodes savings, once your $10 can’t buy $10 worth of stuff, you’re gonna dip into your savings

    • Makes consumers poorer through reduced purchasing power

The Business Cycle

  1. The U.S./World economy cycles

    • It expands and contracts

      • Peaks=Booms

      • Trough=Bust

  2. Historical Cycles

    • 20s and 80s: booms

      • 30s and 70s: busts

What Can the Government Do?

  • Traditionally? Nothing

    • Laissez-Faire

    • Classical Economics

    • Adam Smith: “Father” of economics