Monday 810

 

Mostly summarized from Gregory Mankiw’s Principles of Economics, 5th Ed.

PART 10 Money and Prices in the Long Run

Chapter 29 of 36 The Monetary System

Section 4 of 22

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Money has three functions in the economy

-1- a medium of exchange

-2- a unit of account

-3 - a store of value

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-3 - A Store of Value

A store of value is something people can use ¬to transfer purchasing power from the present to the future.

When a seller accepts money today in exchange for a good the seller can hold the money and become a buyer of another good later.

Nonmonetary stores of value include gold, stocks and bonds.

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The term wealth is used to refer to the total of all stores of value including both money and nonmonetary assets.

Economists use the term liquidity to describe the ease with which an asset

can be converted into the economy's medium of exchange.

Because money is the economy's medium of exchange, it is the most liquid asset.

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Most stocks and bonds can be sold easily, so are relatively liquid assets.

Selling a house or a famous painting requires more time and effort, so these assets are less liquid.

When people decide in which form to hold their wealth they must balance the liquidity of each asset against the asset's usefulness as a store of value.

Money is the most liquid asset, but it has a fault as a store of value.

When prices rise, the value of money falls.

When goods become more expensive due to inflation, each dollar you hold will buy less and less goods over time.

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products become more expensive

seihin ga yori kōka ni naru

製品がより高価になる

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Mexican peso crisis of December 1994 information. ChatGPT:

The Mexican peso crisis of December 1994 occurred after Mexico had maintained an increasingly overvalued peso while running a large current-account deficit financed heavily by short-term foreign investment.

Political instability and rising U.S. interest rates caused investors to withdraw capital, draining Mexico’s foreign-exchange reserves.

On December 20, 1994, the government devalued the peso, but the move intensified panic, and Mexico allowed the currency to float on December 22. The peso subsequently fell from about 3.4 per U.S. dollar to roughly 8 per dollar in March 1995.

The crisis produced soaring interest rates, banking problems, inflation, and a severe recession in which Mexican real GDP fell about 6% in 1995.

The United States, IMF, and other institutions arranged a large emergency financial package, and Mexico returned to economic growth in 1996.

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As of today (August 10, 2026), the exchange rate is about 17.15 Mexican pesos per U.S. dollar. What has caused the fall from 8 pesos per dollar in 1995? CGPT:

The peso’s decline from 8 per U.S. dollar in 1995 to 17.15 today has mainly resulted from Mexico experiencing cumulatively higher inflation than the United States, which over decades tends to reduce a currency’s value relative to a lower-inflation currency.

Since the 1994–95 crisis, Mexico has also operated primarily with a floating exchange rate, allowing the peso to rise or fall with market forces rather than maintaining a fixed dollar value.

Periodic financial shocks have produced additional depreciation —for example, the peso fell more than 20% in one week during the 2008 global financial crisis— while changes in U.S. interest rates, investor confidence, capital flows, oil prices, and perceptions of Mexican economic and political risk have repeatedly moved the currency downward in value.

Thus, the move from 8 to 17 pesos per dollar was not one continuous crisis, but the cumulative result of inflation differences and several periods of depreciation over three decades.