Money and Financial market. Lecture 3

1.

Lecture 3.
Money and Financial market
Armine Vekilyan

2.

Learning objectives
What we want to learn today?
- What is money?
- What is money needed for?
- Where does money come from?
- How is money market defined?
- What is the price of money?

3.

Historically money has been of two kinds:
Commodity money:
Takes the form of a commodity with intrinsic value
Examples: gold coins
What are the examples of commodity money?
Fiat money or token money:
Has no intrinsic value
Consists of coins, currency notes, and checks
What are the new possible fiat “money” appearing?

4.

To an economist, money does not refer to all wealth but
only to one type of it: money is the stock of assets that can
be readily used to make transactions.
As a store of value, money is a way to transfer purchasing
power from the present to the future.
As a unit of account, money provides the terms in which
prices are quoted and debts are recorded
As a medium of exchange, money is what we use to buy
goods and services.
As a standard of deferred payment, money is being a
widely accepted way to value a debt, thereby allowing goods
and services to be acquired now and paid for in the future.

5.

The quantity of money in an economy needs to be measured.
Initially, this was easy: Quantity of money = currency with the
public.
Monetary
aggregates
The money base M0 = CU+R or stock of high-powered money H (or
monetary base B)
– the quantity of notes and coin in private circulation(CU) plus the
quantity held by the banking system ( R)
– where CU means (public) cash and R is the cash reserves held by
banks
A basic measure of the quantity of money is M1 = Cu+D. It is:
Currency: the paper bills and coins in the hands of the public, plus
Demand deposits: balances in bank accounts that depositors can use
as payment by writing a check.
And a few other less important things, such as travelers’ checks
There is also M2 = M1+ savings deposits (less than $100,000)
and money market mutual funds
There is also M3 = M2+ time deposits
Liquidity

6.

Motives for holding money?
Transaction motive
payments and receipts are not
perfectly synchronized
The more transactions => the
more money you need
Transaction motive depends on
GDP (Y)
Precautionary
motive
Because of
uncertainty
Speculative motive
People may hold money
rather than bonds
Bonds vs money
Interest rate and money
demand are inversely
related

7.

There’s no market for money!
So we need to come up with its mirror. because money
is the medium of exchange
The market of relevance is the market for bonds
What is happening explicitly in the market for bonds
determines what is happening in the implicit market
for money
L0+B0=W=LD+ BD where L stands for money
holding
W – total wealth
LD – desired real money
BD – desired real bonds holding
B0–BD =LD–L0
excess supply of bonds = excess demand for money
Price of bonds decreases => increase in
interest
Pb
B1s
B2s
P1b
P2b
Bd
B

8.

What does the trade-off depend on?
•Level of transactions
•The interest rate on bonds.
•Price level