chapter 3 What Is Money?

Economist’s Meaning of Money Definition : Anything that is generally accepted in payment for goods and services or in the repayment of debt. (currency, checks, checking & saving account deposits) Money vs. Wealth , vs. Income: Wealth: total collection of pieces of property that serve as store of value (e.g. stocks, bonds, lands). Income: flow of earnings per unit of time. While money is a stock: certain amount at a given point in time.

Functions of Money 1.Medium of exchange: 2.Unit of account: Used as a payment for goods and services 2.Unit of account: Used as a measure for the value of goods and services in the economy 3.Store of value: Used as a repository (storage) of purchasing power over time. It is used to save purchasing power from the time income is received until the time it is spent

Evolution of the Payments System Payment system: Shows the method of conducting transactions in the economy Means of payment: 1. Commodity Money 2. Fiat Money 3. Checks 4. Electronic means of payment 5. Electronic money ( Debit Card, Credit Card, Smart Card, E-Cash)

Measuring Money We defined money as anything generally accepted in payment for goods and services. What makes an asset money is that people believe it will be accepted by others when making payment. The Central Bank (CB) is responsible for Monetary Policy and it measures money in the economy.

Value as of December 2005 ($billions) Measuring Money – M1 Value as of December 2005 ($billions) M1 = Currency in circulation 725.2 + Traveler’s checks 7.3 + Demand deposits 338.8 + Other checkable deposits 317.8 Total M1 1,389.1

Value as of December 2005 ($billions) Measuring money – M2 Value as of December 2005 ($billions) M2 = M1 1,389.1 + Time deposits 968,8 + Savings deposits 3626.5 + Money market mutual fund shares 723.9 Total M2 5,319.2

There also used to be a broader measure of money ((M3 )), which was discontinued as of March 2006. Usually Central Bank refers money supply to M2. Which component in the M1 is most liquid? Which component in the M2 is most liquid?