Money and Banking Chapter 1 What is money

Money and Banking Chapter 1 What is money?

Learning Objectives • Describe what money is • List and summarize the functions of money • Identify different types of payment systems • Compare and contrast the M 1 and M 2 money supplies

Money • Money (or the “money supply”): anything that is generally accepted as payment for goods or services or in the repayment of debts. • Money (a stock concept) is different from: • Wealth: the total collection of pieces of property that serve to store value • Income: flow of earnings per unit of time (a flow concept)

Functions of Money • Medium of Exchange: • Use of asset in a transaction to buy/sell goods and services • Unit of Account: • Used to measure value in the economy • Reduces transaction costs • Store of Value: • Used to save purchasing power over time • Other assets also serve this function. • Money is the most liquid of all assets but loses value during inflation.

Evolution of the Payments System • Commodity Money: valuable, easily standardized and divisible commodities (e. g. precious metals, cigarettes) • Fiat Money: paper money decreed by governments as legal tender • Checks: an instruction to your bank to transfer money from your account • Electronic Payment (e. g. online bill pay) • E-Money (electronic money): • Debit card • Stored-value card (smart card) • E-cash

Group discussion • What was the last thing you bought? How did you pay for it? • How often do you have cash in your wallet? How often do you pay with a debit/credit card? • What other forms of payment have you used? (Apple Pay, Bitcoin, Paypal) • Are we headed towards a cashless society?

Measuring Money in the Economy Monetary Aggregates: • M 1 – most liquid form of money • Currency in circulation • Money in checking accounts • Traveler’s checks • M 2 – M 1+ • Small time deposits • Savings deposits • Money market deposit accounts (Certificates of Deposit)

Finding the data • Go to https: //www. federalreserve. gov/data. htm • Find “Money Stock Measures” H. 6 • Go to Table 3 (M 1 Components) • What is the largest component of M 1? Which is the smallest? • Go to Table 4 (Non-M 1 M 2 Components) • What is the largest component of M 2? Which is the smallest? • M 1 is what share of M 2? (M 1 total / M 2 total)

Monetary Aggregates M 1 M 2 Currency Traveler’s Checks Demand Deposits Other Check. Dep Small Den. Dep. Savings and MM Money Market Mutual Funds Shares M 3

Growth Rates of the M 1 and M 2, 1960– 2014

Key Takeaways • Money is an important part of the economy – but it is different than wealth or income • People consider how much money they want to hold by balancing their preferences for returns vs. liquidity • Money serves three key functions • Money in the economy is categorized in M 1 and M 2 – also known as the money supply