Money

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Lesson 9-1 Money
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Defining Money   The Functions of Money   A
medium of exchange is anything that is widely
accepted as a means of payment.   Money is
anything that serves as a medium of
exchange.   In the absence of money, exchanges
must be made by barter.   Barter occurs when
goods are exchanged directly for one another.  
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A unit of account is a consistent means of
measuring the value of things.   A store of value
is the ability of an item to hold value over
time.   Because money is a store of value, it can
be used as a standard of deferred
payment.   Money is not a risk-free store of
value because inflation may erode its purchasing
power.
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Types of Money   Money either has intrinsic value
or it does not have intrinsic value.   Commodity
money has intrinsic value.   Commodity money is
money that has value apart from its use as
money.   The commodity use of money competes with
the money use resulting in erratic fluctuations
in the quantity available for the money
use.   Commodity money may vary in quality.  
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Greshams Law is the tendency for a lower-quality
commodity (bad money) to drive a higher-quality
commodity (good money) out of circulation.   Fiat
money has no intrinsic value. Fiat money is
money that some authority, generally a
government, has ordered be accepted as
money.   Currency and coin used in the United
States is fiat money.   Currency is paper money
and coin issued by a government.   Checkable
deposits are fiat money.  
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A checkable deposit is a bank deposit whose
ownership can be transferred with a check.   A
check is a legal document used to transfer the
ownership of a checkable deposit.   A debit card
is an alternative way to transfer ownership of a
checkable deposit.
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Measuring Money   The quantity of money in the
economy at any one time is called the money
supply.   The liquidity of an asset is the ease
with which it can be converted into
currency.   Currency is perfectly liquid.   There
are three different measures of money.   M1 is
currency in circulation, checkable deposits, and
travelers checks.  
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M2 includes M1 and other deposits such as small
time deposits (less than 100,000) and savings
accounts, as well as accounts such as money
market mutual funds (MMMFs) that place limits on
the number or the amounts of the checks that can
be written.   M1 is the narrowest and most liquid
of the measures of the money supply.