1 Chapter 3 What Is Money?

2 Meaning of Money Money (money supply)anything that is generally accepted in payment for goods or services or in the repayment of debts; a stock concept. Money supply is the total amount of money available in the economy. (stock) Wealththe total collection of pieces of property that serve to store value (stock) Incomeflow of earnings per unit of time (flow)

3 Functions of Money Medium of Exchangepromotes economic efficiency by minimizing the time spent in exchanging goods and services. Facilitates specialization and division of labor. A good medium of exchange Must be easily standardized Must be widely accepted Must be divisible Must be easy to carry Must not deteriorate quickly Unit of Accountused to measure value in the economy: assets, goods, services. Store of Valueused to save purchasing power; allows intertemporal substitution of income most liquid of all assets but High inflation diminishes its store of value function.

4 Evolution of the Payments System Commodity Money: Gold, Silver, other precious metals, certain stones, Cigarettes, etc. Representative money that is backed 100 % by precious metals (banknotes) Fiat Money: No consumption or investment use: intrinsically useless pieces of paper. Checks Electronic Payments: EFTs, wire trasfers. E-money: Debit cards (POS), etc.

5 Definitions of Money From most liquid (narrow) to the least liquid (broad), M0, M1, M2, M2Y, M3.. M0 = paper currency and coins M1 = M0+ Checking Accounts+ Traveler Checks M2 = M1 + Savings Accounts M2Y = M2 + Forex Accounts

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9 Monetary Policy Dollarization and Monetary Transmission in Turkey, Erdem BAŞÇI Vice Governor Central Bank of Turkey December 2006

10 Asset Dollarization Share of FX-Denominated Deposits in Total Deposits Dollarization and Monetary Transmission in Turkey, Erdem BAŞÇI Vice Governor Central Bank of Turkey