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1
Chapter 2Principles of Money
© 2000 South-Western College Publishing
2
MoneyMoney is is
Anything that functions as a means of payment (medium of exchange), unit of account, and store of value
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Means of Payment(medium of exchange)
Something that is generally acceptable to make payments
4
What is barter?
Trading goods for goods
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Double Coincidence of WantsDouble Coincidence of Wants
In barter, when each person involved in a potential exchange has what the other person wants
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Store of ValueStore of Value
Something that retains its value over time
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Unit of AccountUnit of Account
A standardized accounting unit such as the dollar that is the consistent measure of value
8
Transactions costs associated with
barter
Development of money
Specialization and division of labor
Economic development
Exchange (trading)
encourage
facilitates
facilitates
facilitates
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Money Market Deposit Accounts (MMDAs)
Money Market Deposit Accounts (MMDAs)
Financial claims — with some check-writing privileges —that earn higher interest than checkable deposits and have a higher minimum balance
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Unit of AccountThe accounting unit or
standardized measure of value in which prices are quoted
Exhibit 2.1
Medium of ExchangeA means of payment; something used
in transactions to make payments
Store of ValueSomething that retains
its value if held
$
Functions of Money
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Monetary Aggregates are
The measures of money — including M1, M2, M3, and L — that are monitored and tracked by the Fed
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What is M1?
Currency in the hands of the public plus checkable deposit
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What is M2?
Everything in M1 plus other highly liquid assets
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What is M3?
Everything in M2 plus some less liquid assets
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What is L?
Everything in M3 plus some additional less liquid assets
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Checkable Deposits
Deposits that are subject to withdrawal by writing a check
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Demand Deposits
Non-interest earning checking accounts issued by banks
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Negotiable Orders of Withdrawal (NOW)
Interest-earning checking accounts
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Near Monies
Highly liquid financial assets that can easily be converted to transactions money (M1) without loss of value
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Domestic Nonfinancial Debt (DNFD)
An aggregate that is a measure of total credit market debt owed by the domestic nonfinancial government and private sectors
21Exhibit 2.3
$1,080.8
M1 M2 M3 L DNFD
April 1998 (Billions)
$4,164.9$5,574.3
$6,825.6
$15,477.3
22Exhibit 2.4
20001995199019851980197519701965
$3,000
$6,000
$9,000
$12,000
$15,000
M1
M2M3
L
DNFD
Monetary Aggregates and DNFD, 1960-1999
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Payments MechanismPayments Mechanism
The means by which transactions are consummatedhow money is transferred in an exchange
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Electronic Funds Transfer System
The transfer of funds to third parties in response to electronic instructions rather than instructions written on a paper check
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Point-of-Sale Terminals
Computer terminals that use a credit card to electronically transfer funds from a deposit account to the account of a third party
26
Automated Teller Machines (ATMs)
Machines that permit a depositor to make deposits and withdrawals to an account even if the financial institution is closed