3 Flashcards
What is the definition of money?
Money is anything that is generally accepted as payment for goods and services or for the repayment of debts.
What is the difference between money, wealth, and income?
Money is a stock variable that serves as a means of payment.
Wealth is the total collection of assets.
Income is a flow of earnings over time.
What are the three main functions of money?
Medium of Exchange – Facilitates transactions and eliminates the need for bartering.
Unit of Account – Measures and compares the value of goods and services.
Store of Value – Maintains purchasing power over time.
Requirements for the median of exchange (4)
easily standardized (so everyone knows what it’s worth).
widely accepted
divisible (able to break into smaller parts for different transaction sizes).
easy to carry and must not deteriorate (be durable, like paper money or coins)
What are the different types of money in the payments system?
- commodity money
- fiat money
- checks
- electronic payments
- e-money
what is commodity money
Physical goods with intrinsic value (e.g., gold, silver).
what is fiat money
Government-issued currency with no intrinsic value, but people accept it because they can use it in the future and because it is mandated by law.
what are checks
Written instructions to your bank to transfer money from an account to another party
What is Electronic Payment
Digital transactions
examples of E-Money?
E-Money refers to electronic money such as:
Debit cards
Stored-value cards (smart cards)
E-cash
What is liquidity?
Liquidity is the ease with which an asset can be converted into cash without losing value.
spectrum of liquidity
- Currency, cash (most liquid)
- Checking accounts (demand deposits)
- Saving accounts
- Government bonds
- Corporate bonds, stocks
- Real estate, art (least liquid)
What are the main measures of the money supply based on degree of liquidity
- M1
- M2
- M3
what is M1
Currency + Demand deposits + Other checkable deposits + Traveler’s checks.
This is the narrowest definition, only most liquid assets.
what is M2
M2 = M1 + Small-denomination (<$100k) time deposits + Saving and Money market deposits + Money market mutual fund shares.
adds to M1 other assets that are not so liquid
what is M3
The broadest definition and includes assets not used as means of payment.
Should we focus on short-run or long-run movements in money supply data?
We should not pay much attention to short-run movements in the money supply numbers, but instead focus on longer-run movements.
Why are revisions issued for money data?
Revisions to money data are issued because:
Small depository institutions report infrequently.
Adjustments must be made for seasonal variation.
