Exam 1 Study Guide
Lecture 1: What is Money? 08/23
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Definition of money
Common functions of money
o Medium of exchange (necessary, but not sufficient)
o Store of value (necessary, but trivial)
o Unit of account (unnecessary)
Inside money versus outside money
Definition of commodity money
Definition of fiat money
Why do we use money?
o Historical Materialist View
o Economic View
Lecture 2: Emergency of Money 08/25
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State Theory of Money
Tools governments use to determine medium of exchange
o Public receivability
o Legal tender status
o Forced money laws
o Ban alternatives
Spontaneous Order Theory of Money
Characteristics of a good money
o Saleable (widely accepted)
o Durable
o Portable
o Divisible
o Uniform
o Limited, predictable supply
Lecture 3: Purchasing Power and the Price Level 08/30
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Common measures of the price level
o Consumer Price Index
o Personal Consumption Expenditures Price Index
o GDP Deflator
Definition of inflation, deflation, and disinflation
Calculate simple inflation rate
o π = (Pt+1 – Pt)/Pt
How to calculate continuously-compounding annual rate of inflation
o π = [ln(Pt) – ln(Pj)]/n
Lecture 4: Money and Inflation 09/01
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Adjusting for inflation
The difference between real and nominal variables
The equation of exchange
o MV = PY
o You should be able to solve for one of the variables when given the other three.
Quantity Theory of Money
Dynamic Equation of Exchange
o m+v=π+y
o You should be able to solve for one of the variables when given the other three.
Dynamic Quantity Theory of Money
Three Views on Optimal Rate of Inflation
Lecture 5: The Classical Gold Standard: Theory 09/06
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Definition of a monetary regime
Simple Model for the Gold Standard
o Demand for Money
o Supply of Money
o Long-run marginal cost of producing gold coins
Comparative Statics
o Increase in money demand
o Decrease in money demand
o Increase in money supply
o Decrease in money supply
Lecture 6: The Classical Gold Standard: Evidence 09/08
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Comparative Statics
o Increase in non-monetary demand
o Decrease in non-monetary demand
o Increase in long run marginal cost of producing gold coins
o Decrease in long run marginal cost of producing gold coins
Endogenous money
Comparative Performance of market-based gold standard and central bank-managed fiat money
o Inflation
o Purchasing power volatility
o Purchasing power predictability
o Real output growth
o Real output volatility