Money and banking
What money does
- Money is anything widely accepted in payment. Four jobs:
- medium of exchange (buy/sell, avoiding barter),
- store of value (keeps worth, so you can save),
- unit of account (measures/compares prices),
- standard of deferred payment (borrow and repay later).
- Good money is durable, portable, divisible, hard to fake, limited in supply.
Practice
Using money to buy and sell, instead of barter, is its function as a:
A medium of exchange lets people trade without barter; the other functions are storing value, measuring prices and deferring payment.
Banks & interest rates
- the central bank issues notes, runs monetary policy, holds reserves, is lender of last resort.
- commercial banks take deposits and make loans — by lending, the system creates money.
- The interest rate is set where the demand for money (liquidity preference) meets the money supply; more supply → lower rate.
Practice
Which role belongs to the central bank?
The central bank issues notes, runs monetary policy and is lender of last resort; commercial banks take deposits and lend.
Moral hazard
- Moral hazard — banks take bigger risks because they expect a bailout: they keep the gains but pass losses to others.
Practice
Moral hazard is the risk that banks take bigger risks because they expect to be bailed out.
If banks believe they will be rescued, they may lend recklessly, keeping gains but passing losses on.
You've got it
Key idea
- money: medium of exchange, store of value, unit of account, standard of deferred payment
- central bank (lender of last resort) vs commercial banks (lend → create money)
- the interest rate = demand for money meets money supply; moral hazard = risk-taking expecting a bailout