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Chapter 13 Money and Banking

Chapter 13 Money and Banking. What is money?. Money is what money does Anything that performs the functions of money is money What are the functions of money? Medium of exchange Unit of account Store of value. 1. Medium of exchange. Used to buy goods and services Accepted in payments

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Chapter 13 Money and Banking

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  1. Chapter 13Money and Banking Alomar_111_19

  2. What is money? • Money is what money does • Anything that performs the functions of money is money • What are the functions of money? • Medium of exchange • Unit of account • Store of value Alomar_111_19

  3. 1. Medium of exchange • Used to buy goods and services • Accepted in payments • Barter system • Convenient way of exchange: specialization Alomar_111_19

  4. 2. Unit of account • Monetary units (KD) to measure the relative worth of goods and services • The price of each good and services is stated in monetary terms • Enable buyers to compare between a verity of goods and services • Debt, GDP, taxes Alomar_111_19

  5. 3. Store of value • Transfer purchasing power from the present to the future • Savings • Best store of value in short terms • Efficient liquid asset • Liquidity: transformation of an asset into goods and services • Inflation? Alomar_111_19

  6. Supply of Money: Measuring Money in the Economy • M1 = Currency + Checkable deposits • Currency: Coins + paper money • M2= M1 + Saving deposits + Small time deposits + Money market mutual funds • M3 = M2 + large time deposits Alomar_111_19

  7. Value of Money • Acceptability • Legal Tender • Relative scarcity Alomar_111_19

  8. Money and Prices • What is the relationship between money (quantity of money M1, M2, M3…) and the price level in the economy? Alomar_111_19

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