Money, Financial Intermediation and Governance
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Money, Financial Intermediation and Governance

Dino Falaschetti and Michael J. Orlando

Dino Falaschetti and Michael Orlando unify the treatment of the many deeply related topics in money and banking in this wide-ranging book. By continually building on the assumption that economic actors are maximizers, they explain how monetary and financial services, as well as related governance mechanisms, influence economic performance. In this manner, Money, Financial Intermediation and Governance not only lets readers make sense of today’s monetary authorities and financial markets, it lets them see through superficial complexities to the fundamental influences that will shape those organizations for years to come.
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Chapter 5: Money and the Level of Economic Well-being

Dino Falaschetti and Michael J. Orlando


INTRODUCTION We now understand that money is anything that acts as an exchange medium, and informally developed the idea that money finds value from its capacity to facilitate trade. Our objective for the present chapter is to further develop this idea. We’ll do so by examining how money affects an economy’s consumption possibilities (that is, consumers’ budget sets from Part I), and the level of real economic activity more generally (that is, the level of Q or ‘quantity’ from equilibrating Part I’s demand and supply sides). Leaving this chapter, we should better appreciate how money, despite having no direct effect on consumption possibilities, strongly influences the level of welfare that societies enjoy.1 THE INFERIOR BARTER EQUILIBRIUM An Illustration Suppose, for a moment, that we find ourselves in a money-less world. Suppose also that, while we enjoy a substantial resource endowment (that is, we are ‘rich’), there also exist consumption bundles that would make us happier than would consuming our endowment. How might we trade for these more attractive bundles? For example, if our endowment does not include a car, and we maintain a strong preference for a car, how would we act on this preference? Notice that we cannot simply go to an auto dealer and exchange ‘money’ for a car. Rather, we must happen upon an individual who owns a car we want and maintains a sufficiently strong preference for elements of our endowment. In other words, to enjoy consumption bundles that are superior to...

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