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1、Copyright 2010 Pearson Addison-Wesley.All rights reserved.Chapter 3What Is Money?Copyright 2010 Pearson Addison-Wesley.All rights reserved.3-2Meaning of MoneyWhat is it?Money(or the“money supply”):anything that is generally accepted in payment for goods or services or in the repayment of debts.A rat
2、her broad definitionCopyright 2010 Pearson Addison-Wesley.All rights reserved.3-3Meaning of MoneyMoney(a stock concept)is different from:Wealth:the total collection of pieces of property that serve to store valueIncome:flow of earnings per unit of time(a flow concept)Copyright 2010 Pearson Addison-W
3、esley.All rights reserved.3-4Functions of MoneyMedium of Exchange:Eliminates the trouble of finding a double coincidence of needs(reduces transaction costs)Promotes specializationA medium of exchange mustbe easily standardizedbe widely acceptedbe divisiblebe easy to carrynot deteriorate quicklyCopyr
4、ight 2010 Pearson Addison-Wesley.All rights reserved.3-5Copyright 2010 Pearson Addison-Wesley.All rights reserved.3-6Evolution of the Payments SystemCommodity Money:valuable,easily standardized and divisible commodities(e.g.precious metals,cigarettes).Fiat Money:paper money decreed by governments as
5、 legal tender.Copyright 2010 Pearson Addison-Wesley.All rights reserved.3-7Evolution of the Payments SystemChecks:an instruction to your bank to transfer money from your accountElectronic Payment(e.g.online bill pay).E-Money(electronic money):Debit cardStored-value card(smart card)E-cash Copyright 2
6、010 Pearson Addison-Wesley.All rights reserved.3-8Measuring MoneyHow do we measure money?Which particular assets can be called“money”?Construct monetary aggregates using the concept of liquidity:M1(most liquid assets)=currency+travelers checks+demand deposits+other checkable deposits.Copyright 2010
7、Pearson Addison-Wesley.All rights reserved.3-9Copyright 2010 Pearson Addison-Wesley.All rights reserved.3-10Table 1 Measures of the Monetary AggregatesCopyright 2010 Pearson Addison-Wesley.All rights reserved.3-11Monetary AggregatesCurrencyTravelers ChecksDemand DepositsOther Check.DepM1(4)M2(4+3)M3
8、(4+3+4)Small Den.Dep.Savings and MMMoney Market Mutual Funds SharesCopyright 2010 Pearson Addison-Wesley.All rights reserved.3-12Copyright 2010 Pearson Addison-Wesley.All rights reserved.3-13FIGURE 1 Growth Rates of the M1 and M2 Aggregates,19602008Sources:Federal Reserve Bulletin,p.A4,Table 1.10,va
9、rious issues;Citibase databank;.Copyright 2010 Pearson Addison-Wesley.All rights reserved.3-14Copyright 2010 Pearson Addison-Wesley.All rights reserved.3-15Table 2 Growth Rate of M2:Initial and Revised Series,2008(percent,compounded annual rate)Copyright 2010 Pearson Addison-Wesley.All rights reserv
10、ed.Chapter 4Understanding Interest RatesCopyright 2010 Pearson Addison-Wesley.All rights reserved.3-17Copyright 2010 Pearson Addison-Wesley.All rights reserved.3-18Discounting the FutureCopyright 2010 Pearson Addison-Wesley.All rights reserved.3-19Simple Present ValueCopyright 2010 Pearson Addison-W
11、esley.All rights reserved.3-20Time Line$100$100Year01PV1002$100$100n100/(1+i)100/(1+i)2100/(1+i)nCannot directly compare payments scheduled in different points in the time lineCopyright 2010 Pearson Addison-Wesley.All rights reserved.3-21Four Types of Credit Market InstrumentsSimple LoanFixed Paymen
12、t LoanCoupon BondDiscount BondCopyright 2010 Pearson Addison-Wesley.All rights reserved.3-22Yield to MaturityThe interest rate that equates the present value of cash flow payments received from a debt instrument with its value todayCopyright 2010 Pearson Addison-Wesley.All rights reserved.3-23Copyri
13、ght 2010 Pearson Addison-Wesley.All rights reserved.3-24Fixed Payment LoanCopyright 2010 Pearson Addison-Wesley.All rights reserved.3-25Coupon BondCopyright 2010 Pearson Addison-Wesley.All rights reserved.3-26When the coupon bond is priced at its face value,the yield to maturity equals the coupon ra
14、teThe price of a coupon bond and the yield to maturity are negatively relatedThe yield to maturity is greater than the coupon rate when the bond price is below its face valueTable 1 Yields to Maturity on a 10%-Coupon-Rate Bond Maturing in Ten Years(Face Value=$1,000)Copyright 2010 Pearson Addison-We
15、sley.All rights reserved.3-27Copyright 2010 Pearson Addison-Wesley.All rights reserved.3-28Discount BondCopyright 2010 Pearson Addison-Wesley.All rights reserved.3-29Rate of ReturnCopyright 2010 Pearson Addison-Wesley.All rights reserved.3-30Copyright 2010 Pearson Addison-Wesley.All rights reserved.
16、3-31Rate of Return and Interest Rates(contd)The more distant a bonds maturity,the lower the rate of return the occurs as a result of an increase in the interest rateEven if a bond has a substantial initial interest rate,its return can be negative if interest rates rise Copyright 2010 Pearson Addison
17、-Wesley.All rights reserved.3-32Table 2 One-Year Returns on Different-Maturity 10%-Coupon-Rate Bonds When Interest Rates Rise from 10%to 20%Copyright 2010 Pearson Addison-Wesley.All rights reserved.3-33Interest-Rate RiskPrices and returns for long-term bonds are more volatile than those for shorter-
18、term bondsThere is no interest-rate risk for any bond whose time to maturity matches the holding periodCopyright 2010 Pearson Addison-Wesley.All rights reserved.3-34Real and Nominal Interest RatesNominal interest rate makes no allowance for inflationReal interest rate is adjusted for changes in pric
19、e level so it more accurately reflects the cost of borrowingEx ante real interest rate is adjusted for expected changes in the price levelEx post real interest rate is adjusted for actual changes in the price levelCopyright 2010 Pearson Addison-Wesley.All rights reserved.3-35Fisher EquationCopyright
20、 2010 Pearson Addison-Wesley.All rights reserved.3-36FIGURE 1 Real and Nominal Interest Rates(Three-Month Treasury Bill),19532008Sources:Nominal rates from.The real rate is constructed using the procedure outlined in Frederic S.Mishkin,“The Real Interest Rate:An Empirical Investigation,”Carnegie-Rochester Conference Series on Public Policy 15(1981):151200.This procedure involves estimating expected inflation as a function of past interest rates,inflation,and time trends and then subtracting the expected inflation measure from the nominal interest rate.