1. Lecture 2 What Is Money?  1.Meaning of Money  Money - anything that is generally accepted in payment for goods or services or in the repayment of debts; a stock concept.  Wealth - the total collection of pieces of property that serve to store value.  Income - flow of earnings per unit of time.

2. 1.Meaning of Money  money, wealth are STOCKS amount at a point in time  income is a FLOW amount during a time period

3. examples  I own $2 million in diamonds. period. I am wealthy I have no money

4.  I win $25 million in lottery  I put it under my bed  I quit my job I am weathly I have a lot of money my income is zero examples

5.  software engineer  earnings $100,000/yr  blows it all, every paycheck high income no wealth examples

6. 2.Functions of Money  money is a means of payments  (medium of exchange) -- accepted as payment for goods and services. -- main function of money.

7. without money,  barter for stuff -- need “double coincidence of wants ” -- inefficient: more time shopping, less time producing

8. 2.Functions of Money  Unit of Account --used to measure value in the economy.

9. 2.Functions of Money  Store of Value -- used to save purchasing poweruse (use money to save,accumulate wealth); most liquid of all assets.  money is NOT always a good store of value -- political instability -- poor economy -- high inflation

10. example Historically, the dollar has been a good store of value  70% of U.S. currency is held outside the U.S  but if $ continues to fall, this could change…

11. 2.Functions of Money (Cont’d)  If money is not unique as a store of value, why do people hold money? The answer is liquidity, the relative ease and speed which an asset can be converted into a medium of exchange.

12. 3.Evolution of the Payments System  Commodity Money  Fiat Money  Cheques  Electronic Payment  E-Money

13. 3.Evolution of the Payments System  commodity money has its own value as a good -- gold & silver coins

14. 3.Evolution of the Payments System fiat money -- no value other than fact that it’s accepted in exchange for goods and services

15.  NOT backed by gold since 1934  coins do not contain silver U.S. money is fiat money!

16. fiat money is more efficient commodity money has opportunity cost: you could use it for something else

17. debit or credit cards?  NOT money  payment mechanisms that access money

18. 4.Measuring Money  Money aggregates amount of cash BUT other forms of money too

19.  M1 = currency in circulation + demand deposits + checkable deposits + traveler’s checks $1.4 trillion

20.  M2 = M1 + savings deposits + small time deposits + retail money market deposits $7.3 trillion

21. Comparing measures  get larger M1 < M2  add less liquid assets to larger measures

22. Which measure is best?  move together in general  BUT behavior can vary in short-term  M2 most watched

23. Money as a Weighted Aggregate  The Bank of Canada’s money supply measures are ‘simple-sum’ indices, the index M = x1 + x2 + … + xn, Where xj is one of the n monetary components of the monetary aggregate M Weighted monetary aggregates seem to predict inflation and the business cycle somewhat better than the conventional measures

24. Growth Rates in Monetary Aggregates

25. Money Growth and Inflation

26. How Reliable are the Money Data?  Revisions are issued because: Small depository institutions report infrequently Adjustments must be made for seasonal variation  We probably should not pay much attention to short-run movements in the money supply numbers but should be concerned only with longer-run movements.