Money Basics

Objectives

1

2

3

Define Money

Identify the 3 Functions of Money

Identify and Calculate the Monetary Aggregates

Barter

Barter – the direct exchange of goods and services for other goods and services

Barter

The difficulty with barter is suppose you don’t have something the other person wants.

Trade can’t occur

Double Coincidence of Wants in order for trade to occur both parties must have something the other wants

Money

Money was developed to overcome the inherent difficulties of barter.Money became the thing that everyone accepted in exchange for goods and services.

Money

Any commodity or token that is generally accepted as a means of payment

Money

Commodity good with intrinsic value such as a cow

Intrinsic value means the good has value even if it isn’t used as money

Money

Token has value because people assign value to it

A nickel really doesn’t have a nickels worth of nickel in it.

Money

generally accepted can be used to buy anything and everything

Money

Means of Payment method of settling a debt

Money is any commodity or token that is generally accepted as a means of payment

Three Functions

In order for something to be money it must perform three functions

Medium of ExchangeStore of ValueUnit of Account

A function is a purpose. A hammer has use because it performs its purpose of hammering things. Money has use because it does these three things

Medium of Exchange

An object that is generally accepted in return for goods and services

In exchange for cooking services, Giada will accept money

Store of Value

A store of value is any commodity or token that can be held and exchanged later for goods and servicesThe more stable the value of a commodity or token, the better it can act as a store of value and the more useful it is as money

Unit of Account

An agreed-upon measure for stating the prices of goods and services.Allows for price comparisons

Just as a ruler measures inches, money measures the relative worth of different goods

Liquidity

Ease with which an asset can be turned into a medium of exchange

Want to have some liquid assets so we can buy the stuff we need

Liquidity refers to how fast an asset can be turned into a medium of exchange and spent

Liquidity

Currency and checking deposits Savings

Deposits Securities Real Estate

More Liquid Less Liquid

Money Today

Money today can be either commodity money or fiat money

For the most part, money today is fiat but there still is a role for commodity money

Money Today

Commodity Money money that takes the form of a commodity with intrinsic value

Money Today

Fiat Money money without intrinsic value that is used as money because of a government decree

A fiat is an order or decree. Compare the money in your wallet with monopoly money. Why can’t you use monopoly money but you can use the money in your wallet? The answer is the U.S. government has decreed its dollars to be valid money.

M1 and M2

Monetary Aggregates these are the measures of the money supply

The monetary aggregates include:

M1M2

When we ask how much money is in the economy we answer this by looking at the monetary aggregates.

The monetary aggregates M1 and M2 group money according to liquidity.

M1

M1 includes the currency held by the public plus demand deposits and travelers checks

M1 is the most liquid of the monetary aggregates. M1 is that money that is already in the form of a medium of exchange and can be spent

Note: currency in a bank is not money

M1

Money in the U.S. Economy Money used in the U.S. economy today includes:

CurrencyCoinDemand

Deposits

Traveler’s Checks

Currency and demand deposits are money because they are generally acceptable as a way of settling a debt.

M1

Currency and Coins Currency includes the paper bills and coins in the hands of the public

M1

Demand Deposits balances in bank accounts that depositors can access on demand by writing a check

The check itself is not money but the deposits in your account are. Those deposits are just accessed by writing a check.

M2

M2 includes M1 plus other near monies

M2 includes M1 so it is much larger.

Near monies are those assets that aren’t a medium of exchange but can very quickly be converted into a medium of exchange they include:

Savings depositsSmall time

depositsMoney market mutual funds

largest component of M2