Meaning of Money Money (money supply)—a generally accepted means of payment for goods, services or debts  Money is a stock …the stock of dollars in our wallets …the stock of credits in our bank accounts Wealth—the total of assets that store value  Money is one component of our wealth Income—the flow of earnings per unit time  We earn income.. we don’t “make money” (unless we’re counterfeiters)

Functions of Money … the usual suspects Medium of Exchange — promotes economic efficiency by minimizing the time spent buying things  Must be easily standardized … widely accepted … divisible … easy to carry … durable Unit of Account — measures value  Prices set / records kept / contracts made in money terms Store of Value —stores purchasing power  Most liquid of all assets  Yields no or minimal interest  Keeps its nominal value: $1 is a $1  Loses value during inflation

Evolution of the Payments System Commodity Money Fiat Money Checks Electronic Payment E-Money Measures of Money Stock Revisions are issued because:  Small depository institutions report infrequently Be concerned only with longer-run movements of money supply measures

Growth Rates of the M1 and M2 Aggregates, 1960–2008 Sources: Federal Reserve Bulletin, p. A4, Table 1.10, various issues; Citibase databank;

Growth Rate of M2: Initial and Revised Series, 2008 (percent, compounded annual rate)

2.2 If I can buy a car today for $5,000 and it is worth $10,000 in extra income next year to me because it enables me to get a job as a traveling anvil seller, should I take a loan from Larry the Loan Shark at a 90% interest rate if no one else will give me a loan? 2.7 How can the adverse selection problem explain why you are more likely to make a loan to family member than to a stranger? 3.8 Rank the following assets from most liquid to least liquid: a)Checking account deposits; b) Houses; c) Currency; d) Washing machines; e) Savings deposits; f) Commons stock In Brazil, a country that underwent a rapid inflation before 1994, many transactions were conducted in dollars rather than reals. Why? 3.14 For each of the following, indicate the monetary aggregate (M1, M2) that includes them: Currency; b) Money market mutual funds; c) Small-denomination CDs; d) Checkable deposits.