MACROECONOMICS CHAPTER 4: The Monetary System: What It Is and How It Works
Macroeconomics 11th Edition By N. Gregory Mankiw
Monetary policy and fiscal policy Fiscal policy
● The government’s decisions about spending and
taxation
● Usually made by elected representatives
Monetary policy
● Decisions about the nation’s system of coin,
currency, and banking.
● Made by central banks
○ Which are typically set up by elected
representatives but allowed to operate
independently.
○ Central Banks have a major influence
over the world
, MACROECONOMICS CHAPTER 4: The Monetary System: What It Is and How It Works
Macroeconomics 11th Edition By N. Gregory Mankiw
What Is Money? A stock of assets
● That can be readily used to make transactions.
● That is made up by the currencies in the hands of
the public
The Functions of Money 1) A store of value
● Money→a way to transfer purchasing power
from the present to the future.
○ You can hold your money and trade it for
goods and services whenever
● Problems:
○ If prices rise, the amount you can buy with
any given quantity of money falls.
2) A unit of account
● Money→ provides the metric people use to
quote prices and record debts.
● Resources are allocated according to the prices
of goods relative to other goods, yet prices are
posted as amounts of a currency.
○ A car dealer says that a car costs
$40,000, not 800 shirts (though the two
may be equivalent)
3) A medium of exchange
● Money→ used to buy goods and services
● Money is the medium of exchange, so it is the
economy’s most liquid asset.
○ Asset liquidity→ The ease with which
an asset can be converted into the
medium of exchange and used to
buy other things
Macroeconomics 11th Edition By N. Gregory Mankiw
Monetary policy and fiscal policy Fiscal policy
● The government’s decisions about spending and
taxation
● Usually made by elected representatives
Monetary policy
● Decisions about the nation’s system of coin,
currency, and banking.
● Made by central banks
○ Which are typically set up by elected
representatives but allowed to operate
independently.
○ Central Banks have a major influence
over the world
, MACROECONOMICS CHAPTER 4: The Monetary System: What It Is and How It Works
Macroeconomics 11th Edition By N. Gregory Mankiw
What Is Money? A stock of assets
● That can be readily used to make transactions.
● That is made up by the currencies in the hands of
the public
The Functions of Money 1) A store of value
● Money→a way to transfer purchasing power
from the present to the future.
○ You can hold your money and trade it for
goods and services whenever
● Problems:
○ If prices rise, the amount you can buy with
any given quantity of money falls.
2) A unit of account
● Money→ provides the metric people use to
quote prices and record debts.
● Resources are allocated according to the prices
of goods relative to other goods, yet prices are
posted as amounts of a currency.
○ A car dealer says that a car costs
$40,000, not 800 shirts (though the two
may be equivalent)
3) A medium of exchange
● Money→ used to buy goods and services
● Money is the medium of exchange, so it is the
economy’s most liquid asset.
○ Asset liquidity→ The ease with which
an asset can be converted into the
medium of exchange and used to
buy other things
