Money

1
Money

• Chapter 13

2
Three Functions of Money

• medium of exchange
• unit of account
• store of value

3
Characteristics of Money

• durability
• portability
• divisibility
• uniformity
• limited supply
• acceptability

4
Sources of Moneys Value

• Commodity Money
• in of itself the object has value
• Representative Money
• object can be exchanged for something
• not worth a continental
• Fiat Money
• legal tender
• value because the gov. issues it

5
M1

• currency
• checkable deposits

6
M1 Currency

• coins 2-3 small change haha
• token money intrinsic value is less than face
  value of the coin (cant melt down and use as a
  commodity)
• paper 46
• Federal Reserve Notes issued by Federal Reserve

7
M1 Checkable Deposits

• largest component 52
• convenience and security of checks
• Commercial Banks primary depository
  institutions. short term loans, keep safe
• Thrifts
• SL (mortgages)
• mutual savings (mortgages)
• credit unions (members only)
• checkable deposits also known as NOW (negotiable
  order of withdrawal) accounts or ATS (automatic
  transfer service) accounts

8
Qualification

• checkable and currency owned by G, FR, commercial
  and other financial institutions are EXCLUDED
  from M1.
• commercial (double counting)
• G (private sector)

9
M2

• all of M1 several near monies
• savings accounts incl money market acts
• small time deposits - lt100,000 (CDs)
• money market mutual funds ( 500)

10
M3

• all of M2
• large time deposits ( 100,000)
• Most economists prefer M1, some argue for M2
  (broader)

11
What backs the Money Supply?

• the Gs ability to keep value stable
• acceptability
• legal tender
• relative scarcity
• fiat money - b/c G declared it

12
Pl and D

• inverse relationship between price level and the
  purchasing power of the dollar
• D value of dollar
• P price level
• D 1/P
• P 1 D 1
• P 1.20 D 0.833

13
Worst Case

• inflation depreciates the value of money
• rapid decline in money, stop being used
• barter
• use another countrys money