1 - A Simple Model of Money: Building a Model of Money
from Part I - Money
Summary
IN THIS BOOK, we will try to learn about monetary economies through the construction of a series of model economies that replicate essential features of actual monetary economics. All such models are simplifications of the complex economic reality in which we live. They may be useful, however, if they are able to illustrate key elements of the behavior of people who choose to hold money and to predict the reactions of important economic variables such as output, prices, government revenue, and public welfare to changes in policies that involve money. We start our analysis with the simplest conceivable model of money. We will learn what we can from this simple model and then ask how the model fails to adequately represent reality. Throughout the book, we try to correct the model's oversights by adding, one by one, the features it lacks.
To arrive at the simplest possible model of money, we must ask ourselves which features are essential to monetary economics. The demand for money is distinct from the demand for the goods studied elsewhere in economics. People want goods for the utility received from their consumption. In contrast, people do not want money in order to consume it; they want money because money helps them get the things they want to consume. In this way, money is a medium of exchange—something acquired to make it easier to trade for the goods whose consumption is desired.
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- Modeling Monetary Economies , pp. 3 - 33Publisher: Cambridge University PressPrint publication year: 2011