MONEY Functions of Money 1. medium of exchange it is used for buying and selling goods & services 2.

unit of account as a yard stick for measuring the relative worth of a wide variety of goods and services 3. store of value this is the most liquid of all assets; it is the very convenient way to store wealth Definitions of Money A. Money (M1) = currency & checkable deposits The most narrow useful definition, the money supply is designated M1 and is composed of two items. Currency and all checkable deposits 1. currency o this is coins and paper money supply in the hands of the non-bank public o coins and paper money are debts of governments and governments agencies 2. all checkable deposits o deposits is commercial bank and thrift or saving institutions on w/c checks can be drawn o checking accounts represents debts of the commercial banks savings institution Coins from copper to silver, it is the small change of our money supply a very small portion of the money supply; they constitute only 2/3% of M1 coins in circulation are token money Intrinsic value the value of bullion (metal) contained in the coin itself Paper Money constitute about 37% of the economys total money supply Near-Monies Near-Monies are more important for several related reasons: 1. spending habits o the greater the amount of financial wealth people hold as near-monies, the greater their willingness to spend out of their money incomes 2. stability o conversion of near-monies into money or vice versa can affect the economys stability 3. policy o the specific definition of money used is important for monetary policy Kinds of near-monies (4) 1. on demand one can w/draw currency from non-checkable savings at a commercial banks 2. one can also w/draw funds quickly for money market deposits 3. time deposits become available to a deposit at maturity 4. depositors can redeem in a money market mutual fund offered through a mutual fund company Institutions offering checkable deposits 1. commercial banks o such banks are the primary depository institutions, they accept the deposits for household & businesses, keep the money safe until it is demand via checks, and at the meantime use it to make available a wide variety of loans o it provides short-term working capital for business and farmers and they finance consumer purchases of automobiles and durable goods 2. thrift institution o the commercial banks are supplemented by the other financial institutions B. M2 a second and broader definition of money Near-monies these are certain highly liquid financial assets w/c do not directly function as a medium of exchange but can be readily converted into currency or checkable deposits w/out risk of financial loss Fiscal Policy, Taxation and kinds of Taxes (hand-out) ................................................................................................................................................ Determinants of the supply and demand of currency changes in taste any change in consumer taste of preferences for the products of a foreign country may alter the demand for that nations currency and changed its exchange rate relative income changes if a growth of a nations income is more rapid than that of other countries, its currency is likely to depreciate

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relative price level changes changes in the relative price levels of two nations can change the demand and supply of currencies and alter the exchange rate between the two nations currencies relative interest rates changes in relative interest rates between two countries can alter their exchange rate speculation currency speculators are people who buy and sell currencies w/ an eye toward reselling or repurchasing them at a profit

Disadvantages of flexible Exchange rates 1. uncertainty and diminishes trade o the risks and uncertainties associated w/ flexible rates may discourage the flow of trade 2. terms of trade changes o a nations terms of trade will be worsened by a decline in the international value of its currency 3. instability o flexible exchange rates may have destabilizing effects on the domestic economy because wide fluctuations stimulate and then depress industries producing exported goods Causes of income inequality 1. ability differences 2. education and training 3. discrimination 4. tastes and risks 5. unequal distribution of wealth 6. market power 7. luck, connection, and misfortune Three-step process of technological advance 1. invention o the most basic element of technological advance o the first covery of a product or process through the use of imagination, ingenious thinking, and experimentation and the first proof that it will work 2. innovation o second element of technological change, draws directly on invention st st o it is the 1 successful commercial introduction of a new product, the 1 use of a method or the creation of a new form of business enterprise. 3. diffusion o the spread of an innovation through imitation or copying Two broad types of innovation 1. product innovation it involves new and improved products of services 2. process innovation it involves new and improved production or distribution method Benefits of being first 1. patents o the purpose of this is to reduce imitation and its negative effect on the incentive for engaging in R &D 2. copyrights and trademarks o copyright protect publishers of books, computer software, movies, videos, and musical composition to be copied o trademarks give the original innovators of products the exclusive right to use a particular product name 3. brand name recognition o along with trademark protection, brand-name recognition may give the original innovator a major marketing advantage for years or even decades 4. trade secrets and learning by doing o some innovations involve trade secrets w/out w/c competitors cannot imitate the product or process 5. time lags o between innovation & diffusion often permit innovating firms to realize the substantial economic profit 6. profitable buyouts o final advantage of being first arises from the potential of a buyout or an outright purchase of the innovating firm by a larger firm