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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.
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1.Meaning of Money money, wealth are STOCKS amount at a point in time income is a FLOW amount during a time period
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examples I own $2 million in diamonds. period. I am wealthy I have no money
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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
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software engineer earnings $100,000/yr blows it all, every paycheck high income no wealth examples
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2.Functions of Money money is a means of payments (medium of exchange) -- accepted as payment for goods and services. -- main function of money.
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without money, barter for stuff -- need “double coincidence of wants ” -- inefficient: more time shopping, less time producing
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2.Functions of Money Unit of Account --used to measure value in the economy.
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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
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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…
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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.
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3.Evolution of the Payments System Commodity Money Fiat Money Cheques Electronic Payment E-Money
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3.Evolution of the Payments System commodity money has its own value as a good -- gold & silver coins
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3.Evolution of the Payments System fiat money -- no value other than fact that it’s accepted in exchange for goods and services
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NOT backed by gold since 1934 coins do not contain silver U.S. money is fiat money!
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fiat money is more efficient commodity money has opportunity cost: you could use it for something else
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debit or credit cards? NOT money payment mechanisms that access money
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4.Measuring Money Money aggregates amount of cash BUT other forms of money too
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M1 = currency in circulation + demand deposits + checkable deposits + traveler’s checks $1.4 trillion
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M2 = M1 + savings deposits + small time deposits + retail money market deposits $7.3 trillion
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Comparing measures get larger M1 < M2 add less liquid assets to larger measures
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Which measure is best? move together in general BUT behavior can vary in short-term M2 most watched
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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
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Growth Rates in Monetary Aggregates
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Money Growth and Inflation
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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.
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