Lecture 2: Measuring Money Money and Banking - Dr. D. Foster

Money and Banking - Dr. D. Foster The functions of money The functions money serves: medium of exchange. unit of account. store of value. std. of deferred value. To be money, the object must serve as a final means of payment and redeemable on demand at face value. Think of an example of some money that doesn’t serve all these functions (or, at least, not well). Money and Banking - Dr. D. Foster

Money and Banking - Dr. D. Foster Brief History Evolution of money: A “useful” commodity. A money substitute (aka representative money). A fiat money. What will it take for Bitcoin to become money? Bank “notes” as money substitutes. U.S. fiat money – Civil War “greenbacks.” Gold standard: 1879 to 1933/1971. Federal Reserve in 1913. Money and Banking - Dr. D. Foster

Money and Banking - Dr. D. Foster Measurement Measured based on liquidity of financial assets. M1 = [Coins and] currency in circulation (C) + “transactions deposits” (D) + TC M2 = M1 + SDS +TDS + MMMFIndividual M3 = M2 + TDL + MMMFInstitutional + Euro$ + RP Liquidity – how fast, at full market value, an asset can be converted into a means of payment. Review FRS “Regulation D” on components of the money supply. Money and Banking - Dr. D. Foster

Money and Banking - Dr. D. Foster The Monetary Base Monetary Base (MB) = C + bank reserves (R) M1 & M2 are/were highly correlated with MB. M1 relates to economy [M*V=P*Y]. MB plays a role in the government’s budget: G = T + Bonds + MB The Fed has perfect control over the MB but not M1. Why? What does the correlation of MB to M1 imply for policy? Review monetary data. Money and Banking - Dr. D. Foster

Lecture 2: Measuring Money Money and Banking - Dr. D. Foster