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Chapter 2. Money & the Payments Chapter 2. Money & the Payments SystemSystemChapter 2. Money & the Payments Chapter 2. Money & the Payments SystemSystem
• meaning of money
• functions of money
• forms of money
• measuring money
• meaning of money
• functions of money
• forms of money
• measuring money
I. The Meaning of MoneyI. The Meaning of MoneyI. The Meaning of MoneyI. The Meaning of Money
• anything commonly excepted
in exchange for goods/services
• many objects throughout history
• anything commonly excepted
in exchange for goods/services
• many objects throughout history
examplesexamplesexamplesexamples
• livestock
•metals
•cigarettes
•grain
•shells
• livestock
•metals
•cigarettes
•grain
•shells
money, income, & wealthmoney, income, & wealthmoney, income, & wealthmoney, income, & wealth
• money what is accepted as payment
• income earnings during time period (year)
• wealth accumulated assets at pt. in time
• money what is accepted as payment
• income earnings during time period (year)
• wealth accumulated assets at pt. in time
• money, wealth are STOCKS amount at a point in time
• income is a FLOW amount during a time period
• money, wealth are STOCKS amount at a point in time
• income is a FLOW amount during a time period
examplesexamplesexamplesexamples
• I own $2 million in diamonds. period. I am wealthy I have no money
• I own $2 million in diamonds. period. I am wealthy I have no money
• I win $25 million in lottery
• I put it under my bed
• I quit my job I am weathly I have a lot of money my income is zero
• I win $25 million in lottery
• I put it under my bed
• I quit my job I am weathly I have a lot of money my income is zero
• software engineer
• earnings $100,000/yr
• blows it all, every paycheck high income no wealth
• software engineer
• earnings $100,000/yr
• blows it all, every paycheck high income no wealth
II. Functions of MoneyII. Functions of MoneyII. Functions of MoneyII. Functions of Money
• money is a means of payments
• (medium of exchange)
-- accepted as payment for
goods and services
-- main function of money
• money is a means of payments
• (medium of exchange)
-- accepted as payment for
goods and services
-- main function of money
without money,without money,without money,without money,
• barter for stuff
-- need “double coincidence
of wants”
-- inefficient:
more time shopping,
less time producing
• barter for stuff
-- need “double coincidence
of wants”
-- inefficient:
more time shopping,
less time producing
exampleexampleexampleexample
• I have exam 2,
want to trade it for soda• I have exam 2,
want to trade it for soda
You have to want the exam &
be willing to give up soda
AND
I have to want the soda
& be willing to give up exam
You have to want the exam &
be willing to give up soda
AND
I have to want the soda
& be willing to give up exam
double coincidence of wantsdouble coincidence of wantsdouble coincidence of wantsdouble coincidence of wants
to act as money, must beto act as money, must beto act as money, must beto act as money, must be
• measurable
• divisible
• widely accepted
• durable
• measurable
• divisible
• widely accepted
• durable
• money is a unit of account
-- money is used to
measure value
• money is a unit of account
-- money is used to
measure value
• if something costs $5,
not that valuable
• if something costs $500,
that’s valuable
• if something costs $5,
not that valuable
• if something costs $500,
that’s valuable
• money is a store of value
-- use money to save,
accumulate wealth,
buy stuff later
-- money is liquid asset
• money is a store of value
-- use money to save,
accumulate wealth,
buy stuff later
-- money is liquid asset
• money is NOT always
a good store of value
-- political instability
-- poor economy
-- high inflation
• money is NOT always
a good store of value
-- political instability
-- poor economy
-- high inflation
exampleexampleexampleexample
Historically, the dollar has been a good store of value
• 70% of U.S. currency is held outside the U.S
• but if $ continues to fall, this could change…
Historically, the dollar has been a good store of value
• 70% of U.S. currency is held outside the U.S
• but if $ continues to fall, this could change…
III. Forms of MoneyIII. Forms of MoneyIII. Forms of MoneyIII. Forms of Money
• commodity money
has its own value as a good
-- gold & silver coins
• commodity money
has its own value as a good
-- gold & silver coins
• fiat money
-- no value other than
fact that it’s accepted
in exchange for
goods and services
• fiat money
-- no value other than
fact that it’s accepted
in exchange for
goods and services
U.S. money is fiat U.S. money is fiat money!money!U.S. money is fiat U.S. money is fiat money!money!
• NOT backed by gold since 1934
• coins do not contain silver• NOT backed by gold since 1934
• coins do not contain silver
fiat money is more efficientfiat money is more efficientfiat money is more efficientfiat money is more efficient
• commodity money has
opportunity cost:
you could use it
for something else
• commodity money has
opportunity cost:
you could use it
for something else
debit or credit cards?debit or credit cards?debit or credit cards?debit or credit cards?
• NOT money
• payment mechanisms that access money
• NOT money
• payment mechanisms that access money
IV. Measuring MoneyIV. Measuring MoneyIV. Measuring MoneyIV. Measuring Money
• Money aggregatesamount of cash
BUTother forms of money too
• Money aggregatesamount of cash
BUTother forms of money too
M1M1M1M1
= currency in circulation
+ demand deposits
+ checkable deposits
+ traveler’s checks
$1.4 trillion
= currency in circulation
+ demand deposits
+ checkable deposits
+ traveler’s checks
$1.4 trillion
M2M2M2M2
= M1
+ savings deposits
+ small time deposits
+ retail money market deposits
$7.3 trillion
= M1
+ savings deposits
+ small time deposits
+ retail money market deposits
$7.3 trillion
Comparing measuresComparing measuresComparing measuresComparing measures
• get larger M1 < M2
• add less liquid assets to larger measures
• get larger M1 < M2
• add less liquid assets to larger measures
Components of M1
1%
23%
28%
48%
currency
traveler's checks
demand deposits
other checkable
Components of M2M1
22%
small CDs20%savings
39%
money market19%
Which measure is best?Which measure is best?Which measure is best?Which measure is best?
• move together in general
• BUT behavior can vary in short-term
• M2 most watched
• move together in general
• BUT behavior can vary in short-term
• M2 most watched
Growth Rates in Monetary AggregatesGrowth Rates in Monetary AggregatesGrowth Rates in Monetary AggregatesGrowth Rates in Monetary Aggregates
Money Growth and InflationMoney Growth and InflationMoney Growth and InflationMoney Growth and Inflation