The Role and Kinds of Money Flashcards
Money is anything that functions as a medium of _______, store of value, unit of account and standard of deferred payment.
Exchange. This is the form in which future payments are denominated. So, for example, if I borrow money from a US bank, then the loan contract will probably specify repayment at a future date in US dollars. This is a type of deferred payment.
The “____if an account” function that money performs relates to the use of money as a measure of value.
Unit. Money is used as a measure to quantify the value of goods, services and financial assets. So, for example, if I want to buy shirts from a US shop, then the price is expressed in US dollars.
____ functions most importantly as a medium of exchange because it is widely accepted as a form of payment.
Money. Money is used as payment for goods and services, and this enables trade,
Money stock is the _____ of money in existence at a particular point in time.
Amount. Money stock or money supply are synonymous for this definition.
_____ refers to earnings in a given period.
Income. Earnings refer to the flow of income from a given source, such as employment over a particular time period.
The US Federal Reserve uses M1, M2, and M3 to measure ________.
Money supply, These three measurements calculate the amount of money beyond more cash values.
The M1 money aggregate consists of currency, ______’ checks and transaction deposits.
Travelers. M1, M2, ans M3 are different measures of money supply. M1 includes the most liquid forms of money–the tender (currency) that is held outside banks, travelers checks, and transaction deposits.
Transaction deposits are deposits in financial institutions upon which account holders may issue checks for payment; basically, they refer to checking accounts (versus savings accounts from which no checks can be written).
The three types of transaction deposits are _____ deposits, negotiable-order-of-withdrawal accounts and automatic-transfer-system (ATS)
Demand. The three different kinds of transaction deposits refer to different kinds of checking accounts.
Negotiable-order-of-withdrawal (NOW) accounts are interest-bearing checking deposits. Demand deposits are non-interest bearing checking accounts. ATS accounts are a mixed interest-bearing savings account and non-interest bearing checking account, where the savings account is automatically deducted from when the checking account is withdrawn from.
The M2 money aggregate consists of the elements in M1, as well as ______ deposits (this would include money market accounts from which no checks can be written), small denomination time deposits (where small is less then $100,000), retirement accounts.
Savings. M2 is a broader measure of money supply; it not only includes the highly liquid money, but savings deposits and other accounts from which the money can’t be used easily.
Money market accounts include MMMF ( money market mutual funds) and MMDA (money market deposit accounts). MMMF are shares in an investment company that only invest in short-term securities.
Some other elements which fall under M2 are ORP (overnight repurchase agreements), which are sales of securities where the seller promises to buy back the security the next day at an agreed price, and OED (overnight Eurodollar deposits), which are US residents’ dollar denominated deposits in banks outside the US.
_____ money is an asset that meets almost all the requirements of the functions of money.
Near. The main difference between near money and money is that the former are not normally used as a medium of exchange, but are nonetheless highly liquid and readily convertible to cash.
_____ money is good, such as gold coins or shells, which is used as though it is money.
Commodity. Commodity money refers to money whose value comes from a commodity out of which it is made, Examples of commodities that have been used as money include gold, silver, copper, salt, large stones, decorated belts, shells, and cigarettes.
Commodity money is to be destinguised from representative money which is a certificate or token which can be exchanged for the underlying commodity. A key feature of commodity money is that the value is directly perceived by the users of this money, who recognize the utility or beauty of the tokens as they would recognize the goods themselves. That is, the effect of holding a token for a barrel of oil must be the same economically as actually having the barrel at hand,
Full-bodied commodity money means the good used as money is______ as money, and fully-backed commodity money refers to certificates which are fully redeemable against the commodity used as money.
Circulating. Circulation is a sign of acceptance in the community of a particular good as money.
Full-bodied commodity money id typically what someone is referring to when they say “commodity money.” It’s money whose value comes from a commodity out of which it is made.
Fully-backed commodity money may also be called representative money. An example of fully-backed commodity money is if a goldsmith or banker issues paper receipts or certificates always redeemable for an exact quantity of precious metal and the receipts may be traded independently.
Note that fully-backed commodity money, or representative money, is different from fiat money (i.e. the US dollar).
______ money is money that has small use as a commodity, but is accepted because the government has authorized it.
Fiat. Fiat money is money that is declared “legal tender” by a government with no commodity backing. An example is the US dollar which has little commodity value as a piece of paper. The US dollar at one time was technically considered fully-backed commodity money, or representative money, because you were supposed to be able to go to your local bank and trade it for commodity–gold. However, in 1970, when the gold standard was abolished, the US dollar became fiat money. The paper technically isn’t worth anything, and you can’t trade it for gold; it only has value because the government enforces it as currency, and controls the supply.
When a government declares that their money be accepted for payments of ______ then it becomes legal tender.
Debt. If you take a look at the front of a dollar bill, you will see that it says “This note is legal tender for all debts, public and private.”
The main advantage of using money rather than _____ for goods and services that the former enables increased levels of productivity and consumption.
Bartering. Bartering is time-consuming and requires the cooperation of more persons. hence, it is less productive than using money.
Plus, what happens if the person you are bartering with doesn’t like fish, then it has no value.
