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LU 7 Monetary System (Money is the set of assets in an economy that people…
LU 7 Monetary System
Money is the set of assets in an economy that people regularly use to buy goods and services from other people.
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The Kinds of Money
Commodity money takes the form of a commodity with intrinsic value.(Examples: Gold, silver, cigarettes.)
Fiat money is used as money because of government decree. It does not have intrinsic value. (Examples: Coins, currency, check deposits)
Money in the Economy
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Demand deposits are balances in bank accounts that depositors can access on demand by writing a check.
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The Money Multiplier
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In our example,R = 10% (money multiplier = 1/R = 10) $100 of reserves creates $1000 of money
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The inflation ends when the government institutes fiscal reforms such as cuts in government spending
The Fisher effect refers to a one-to-one adjustment of the nominal interest rate to the inflation rate.