Ch 3 Flashcards
Money
or money supply; anything that is generally accepted as payment for goods or services or in the repayment of debts.
Money as a stock concept
WEALTH: the total collection of pieces of property that serve to store value.
INCOME: flow of earnings per unit of time (a flow concept)
Functions of money:
Medium of Exchange
- Eliminates the trouble of finding a double coincidence of needs (reduces transaction costs)
- promotes specialization.
- a medium of exchange must:
1. be easily standardized
2. be widely accepted
3. be divisible
4. be easy to carry
5. not deteriorate quickly
Functions of money:
UNIT OF ACCOUNT:
- used to measure value in the economy
- reduces transaction costs
STORE OF VALUE
- used to save purchasing power over time.
- other assets also serve this function.
- Money is the most liquid of all assets but loses value during inflation.
Evolution of the payment system:
COMMODITY MONEY
Valuable, easily standardized and divisible commodities ( eg precious metals, cigarettes)
Evolution of the payment system:
FIAT MONEY:
Paper money decreed by governments as legal tenders.
Evolution of the payment system:
CHECKS:
an instruction to your bank to transfer money from your account
Evolution of the payment system:
E-PAYMENT (ONLINE BILL)
Paying bills online
Evolution of the payment system:
E-MONEY
(Electronic money):
- Debit Card
- Stored value card (smart card)
- E-cash
Measuring Money
Construct monetary aggregates using the concept of liquidity
M1 (most liquid assets) = currency + traveler’s check + demand deposits + other checkable deposits
M2 (adds to M1 other assets that are not so liquid) = M1 + small denomination time deposits + savings deposits and money market deposit accounts + money market mutual fund shares.
The federal reserve’s monetary aggregates:
M1 vs M2: does it matter which measure of money is considered?
M1 and M2: can move in different directions in the short run
Conclusion: the choice of monetary aggregate is important for policy makers.