- Slides: 10
Introduction to Money What exactly is money?
MONEY • Money- anything used to facilitate the exchange of goods & services between buyers and sellers
3 Functions of Money • Medium of exchange • Unit of account • Store of value anything that is readily acceptable as payment (or standard of value) Any item that people can use to transfer purchasing power from the present to the future The yardstick people use to post prices and record debts
2 Kinds of Money • Commodity money takes the form of a commodity with intrinsic value (inherent value) – Examples: Gold, silver, cigarettes • Fiat money is used by Government decree – It does not have intrinsic value – Examples: Coins, currency, check deposits – U. S. money was backed by gold until 1971
Liquidity • Liquidity is the ease with which an asset can be converted into currency (money) • U. S. financial markets are the most liquid in the world – During the financial crisis subprime mortgages lost all liquidity – Small cap stocks have less liquidity than large cap stocks – When the “tide goes out” => liquidity falls rapidly!
Money in the U. S. Economy • Currency in the form of paper bills & coins • Demand deposits- balances in bank accounts that can be accessed “on demand” by writing a check – Savings accounts are not considered demand deposits • Money Supply- total money in the financial system. It is measured 3 ways known as M 1, M 2 & M 3 – Federal Reserve controls the U. S. money supply
3 Measures of Money Supply Trillions of Dollars M 2 $6. 3 $1. 3 • Savings deposits • Small time deposits • Money market mutual funds • A few minor categories ($5, 035 billion) Large Time deposits Large money markets M 1 • Demand deposits • Traveler’s checks • Other checkable deposits ($664 billion) • Currency (cash) 0 M 3 ($699 billion) • Everything in M 1 ($1. 3 Trillion) Everything in M 1 + M 2 ($6. 3 Trillion)
Money Supply Growth M 3 M 2 M 1
Money Supply • M 1 - most liquid • M 2 - slightly less liquid • M 3 = M 2 + large time deposits (over $100, 000) – Less liquid than M 2 (bank CD’s) • At any given time, the supply of money is fixed by Federal Reserve