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Chapter 2. Money & the Payments System. meaning of money functions of money forms of money measuring money. I. The Meaning of Money. anything commonly excepted in exchange for goods/services many objects throughout history. examples. livestock metals cigarettes grain shells.
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Chapter 2. Money & the Payments System • meaning of money • functions of money • forms of money • measuring money
I. The Meaning of Money • anything commonly excepted in exchange for goods/services • many objects throughout history
examples • livestock • metals • cigarettes • grain • shells
money, income, & wealth • 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
examples • 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
software engineer • earnings $100,000/yr • blows it all, every paycheck • high income • no wealth
II. Functions of Money • money is a means of payments • (medium of exchange) -- accepted as payment for goods and services -- main function of money
without money, • barter for stuff -- need “double coincidence of wants” -- inefficient: more time shopping, less time producing
example • 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
to act as money, must be • measurable • divisible • widely accepted • durable
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
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
example 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 Money • 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
U.S. money is fiat money! • NOT backed by gold since 1934 • coins do not contain silver
fiat money is more efficient • commodity money has opportunity cost: you could use it for something else
debit or credit cards? • NOT money • payment mechanisms that access money
IV. Measuring Money • Money aggregates • amount of cash BUT • other forms of money too
M1 = currency in circulation + demand deposits + checkable deposits + traveler’s checks $1.4 trillion
M2 = M1 + savings deposits + small time deposits + retail money market deposits $7.3 trillion
Comparing measures • get larger • M1 < M2 • add less liquid assets to larger measures
Which measure is best? • move together in general • BUT behavior can vary in short-term • M2 most watched
