1 Chapter 2 Principles of Money © 2000 South-Western College Publishing

2 Money is Anything that functions as a means of payment (medium of exchange), unit of account, and store of value

3 Means of Payment (medium of exchange) Something that is generally acceptable to make payments

4 What is barter? Trading goods for goods

5 Double Coincidence of Wants In barter, when each person involved in a potential exchange has what the other person wants

6 Store of Value Something that retains its value over time

7 Unit of Account A standardized accounting unit such as the dollar that is the consistent measure of value

8 Transactions costs associated with barter Development of money Specialization and division of labor Economic development Exchange (trading) encourage facilitates

9 Money Market Deposit Accounts (MMDAs) Financial claims — with some check-writing privileges —that earn higher interest than checkable deposits and have a higher minimum balance

10 Unit of Account The accounting unit or standardized measure of value in which prices are quoted Exhibit 2.1 Medium of Exchange A means of payment; something used in transactions to make payments Store of Value Something that retains its value if held $ Functions of Money

11 Monetary Aggregates are The measures of money — including M1, M2, M3, and L — that are monitored and tracked by the Fed

12 What is M1? Currency in the hands of the public plus checkable deposit

13 What is M2? Everything in M1 plus other highly liquid assets

14 What is M3? Everything in M2 plus some less liquid assets

15 What is L? Everything in M3 plus some additional less liquid assets

16 Checkable Deposits Deposits that are subject to withdrawal by writing a check

17 Demand Deposits Non-interest earning checking accounts issued by banks

18 Negotiable Orders of Withdrawal (NOW) Interest-earning checking accounts

19 Near Monies Highly liquid financial assets that can easily be converted to transactions money (M1) without loss of value

20 Domestic Nonfinancial Debt (DNFD) An aggregate that is a measure of total credit market debt owed by the domestic nonfinancial government and private sectors

21 Exhibit 2.3 $1,080.8 M1 M2M3LDNFD April 1998 (Billions) $4,164.9 $5,574.3 $6,825.6 $15,477.3

22 Exhibit $3,000 $6,000 $9,000 $12,000 $15,000 M1 M2 M3 L DNFD Monetary Aggregates and DNFD,

23 Payments Mechanism  The means by which transactions are consummated  how money is transferred in an exchange

24 Electronic Funds Transfer System The transfer of funds to third parties in response to electronic instructions rather than instructions written on a paper check

25 Point-of-Sale Terminals Computer terminals that use a credit card to electronically transfer funds from a deposit account to the account of a third party

26 Automated Teller Machines (ATMs) Machines that permit a depositor to make deposits and withdrawals to an account even if the financial institution is closed