Chapter 3 What Is Money?

© 2004 Pearson Addison-Wesley. All rights reserved 3-2 Meaning and Function of Money Economist ’ s Meaning of Money 1.Anything that is generally accepted in payment for goods and services 2.Not the same as wealth or income (Income is a flow, Money is a stock) Functions of Money 1.Medium of exchange 2.Unit of account 3.Store of value Evolution of Payments System 1.Precious metals like gold and silver 2.Paper currency (fiat money) 3.Checks 4.Electronic means of payment 5.Electronic money: Debit cards, Stored-value cards, Smart cards, E-cash

© 2004 Pearson Addison-Wesley. All rights reserved 3-3 Economist’s Meaning of Money 1.Anything that is generally accepted in payment for goods and services 2.Not the same as wealth or income (Income is a flow, Money is a stock)

© 2004 Pearson Addison-Wesley. All rights reserved 3-4 Functions of Money 1.Medium of exchange In a barter economy the transaction cost is high: double coincidence of wants 2.Unit of account N goods need to have: N(N -1)/2 prices 3.Store of value Other assets (land, houses, art, etc.) have advantages. Liquidity, the relative ease and speed with which an asset can be converted into a medium of exchange.

© 2004 Pearson Addison-Wesley. All rights reserved 3-5 Evolution of Payments System 1.Precious metals like gold and silver 2.Paper currency (fiat money) - no intrinsic value 3.Checks 4.Electronic means of payment 5.Electronic money: Debit cards, Stored-value cards, Smart cards, E-cash

3-6 Federal Reserve’s Monetary Aggregates

© 2004 Pearson Addison-Wesley. All rights reserved 3-7 Growth Rates of Fed’s Monetary Aggregates

© 2004 Pearson Addison-Wesley. All rights reserved 3-8 How Reliable are the M2 Money Data: Data Revisions

© 2004 Pearson Addison-Wesley. All rights reserved 3-9 Dilemma for Policy Maker To control the money supply to affect the economy. But which measure of money is the right one (such as Ml, M2, and M3) ? As Figure 1 illustrates, Ml, M2, and M3 do not move together.

© 2004 Pearson Addison-Wesley. All rights reserved 3-10 How Reliable Are the Money Data? Should not pay very much attention to short ‑ run movements in the published money supply numbers, because data revisions can be substantial. Should focus on longer ‑ run movements, such as growth rates over a year ’ s time.