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Understanding Money and the Evolution of Payment Systems

Explore the meaning of money, its functions, and the evolution of payment systems, including commodity money, fiat money, and electronic forms of payment. Learn how money is measured and understand the different monetary aggregates.

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Understanding Money and the Evolution of Payment Systems

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  1. Chapter 3 What Is Money?

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

  3. Functions of Money • 1. • 2. • 3.

  4. Evolution of the Payments System • Commodity Money: • Fiat Money:

  5. Evolution of the Payments System (cont’d) • 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

  6. Measuring Money in the US • How do we measure money? Which particular assets can be called “money”? • Construct monetary aggregates using the concept of liquidity: • M1 (most liquid assets) = • M2 (M1 + other assets that are not so liquid) =

  7. Table 1 Measures of the Monetary Aggregates

  8. Figure 1 Growth Rates of the M1 and M2 Aggregates, 1960–2011 Sources: Federal Reserve Economic Database (FRED); Federal Reserve Bank of Saint Louis; http://research.stlouisfed.org/fred2/categories/25

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