The three key roles of money are medium of exchange, store of value, and unit of account
Money as a medium of exchange is an asset that can be traded for goods and services
Money, as a store of value, is an asset that enables people to transfer purchasingpower into the future.
As a unit of account, money is a universal yardstick used to express relative prices of goods and services.
The quantity theory of money predicts that the inflation rate will equal the growth rate of the money supply minus the growth rate of real GDP
Fiat money is an asset used as legal tender by government decree and not backed by a physical commodity like gold, e.g. the U.S. dollar and other national currencies.
Fiat money has no intrinsic value, i.e. there is zero “direct” utility from it.
The money supply, M2, is the sum of currency in circulation, checking accounts, savings accounts, and most other bank accounts.
M2 is about 9 times the magnitude of currency in circulation.
Growth rate of nominal GDP = Growth rate of real GDP + Inflation Rate
The quantity theory of money assumes that the ratio of money to GDP is constant: Money Supply / Nominal GDP = Constant
The quantity theory of money's constant implies that the growth rate of money supply grows at the same rate as the growth rate of nominal GDP
Liquidity refers to funds (and assets) that can be used immediately to conduct transactions.
The demand curve for bank reserves shifts when one of the following changes occurs:
Economic expansion or contraction
Changed liquidity needs
Changed deposit base given the reserve requirement
Changd the reserve requirement (currently at 10%)
Changed the interest rate paid to deposits at the Central Bank.
The Supply Curve for Bank Reserves is vertical as the demand for bank reserves is inelastic.
Real interest rate = Nominal interest rate - Inflation rate
People form inflation expectations from 2 models: adaptive expectations (backwards -looking) & rational expectations (forward -looking).