Money, Banking, and Finance Chapter 11

Money, Banking, and Finance

Chapter 11

© Dünhaupt, Dullien, Goodwin, Harris, Nelson, Roach, Torras

Learning Goals

• After today‘s lecture, you will be able to:
• Describe the consequences of inflation and deflation.
• Describe the functions and types of money.
• Describe the measures of the money supply
• Explain how banks create money.
• Describe the categories and functions of nonbank financial institutions.
• Explain the concept of “speculative bubble” and illustrate it with concrete examples.

Chapter Outline

• Why Money?
• What is Money?
• The Banking System
• Money and Finance

Why Money?

Why Money: Making Transactions Easier

• Imagine there was no money:
• You would need to barter
• If you want to get a certain good which you don‘t have and want to exchange something else, you need to find someone who wants just the opposite exchange
• Sometimes, goods are not easily divisible (imagine you want to get some eggs, but only have a cow)

Money and Aggregate Demand

• Imagine you want to buy a house or make an investment, but do not have the means to do so
• You go to a bank and ask for a loan
• If the bank gives you a loan, you will buy the house
• If the bank does not give you a loan or conditions are too harsh, you will walk away not buying the house
• Hence, if the government can influence credit conditions, it can influence aggregate demand!

Some More Basic Thoughts About Money:

• This, however, is only true if inflation is low to moderate
• In some cases, inflation becomes so high that money is not generally accepted anymore
• In these cases, people might resort to barter as money would lose value to quickly
• barter: exchange of goods, services, or assets directly for other goods, services, or assets, without the use of money.