What is Money?

November 2017, M2:

$13.79 Trillion

Money is defined by its ability to serve what three functions simultaneously?

1) Money serves as a medium of exchange, meaning it is widely accepted as payment and used to settle debt. 2) Money is a unit of account, meaning it serves as the benchmark by which all values are measured. It greatly simplifies transactions. 3) Money is a store of value (it retains its value). Although, purchasing power can change.

M2

A broader definition of money, includes all of the M1 components and savings deposits, money market funds (retail), and time deposits. These additional components are not as easy to spend as the M1 components, but are generally accessible.

System of Payments

A society's system of payments is the process through which transactions are made. It evolves over time through changes in technology.

Checks

Allows one to transfer funds to another person without the use of currency. Lowers transaction costs, can be used for almost any amount. Exchange of funds slower than with cash (less liquid).

Fiat Money

Fiat money is a paper currency system decreed by the government as legal tender. Examples include USD, Euro, and Yen. Initially was redeemable for gold or other precious metals.

Disadvantages of Fiat Money

It's hard to make large purchases with just fiat money. It's also inconvenient to carry around large amounts of fiat money.

M1

M1 is the narrowest definition of money and includes currency, traveler's checks, demand deposits, and other checkable deposits. These components are the most ones tracked by the FRS.

November, 2017 M1:

M1 was $3.62 Trillion

What is money?

Money is anything that is accepted as payment for goods and services and for the repayment of debts. It is more than just currency and coin.

E-Money

Money that exists in electronic form only. Used commonly today. Includes Debit cards, Apple Pay, Venmo, and Paypal.

Difference between opportunity costs and monetary costs

Opportunity costs are subjective and vary from person to person. Monetary costs (such as $1) are common to everyone.

Differentiating M1 from M2

Over time, it has become harder to distinguish M1 from M2. Checks are not always accepted by payees. Some savings can be accessed via checks or debit cards. The blurred lines between M1 and M2 have made it harder for economists to track Relationships between M1, M2, and other economic aggregates break down at times.

Money market funds

Savings deposits that are pooled into safe short-term assets.

Commodity Money

The earliest form of money. It is defined to be valuable, easily standardized and divisible, and takes such forms as gold and silver.

Traveler's Checks

They are issued by banks and other financial institutions. They are often accepted abroad. They are not used as often now, but their usage increases during the summer months.

How does the Federal Reserve keep track of the money supply?

They measure monetary aggregates, which are broad measures of the stock of money. Financial innovation has made keeping track of the money supply difficult.

Drawbacks of Commodity Money

Using commodity money makes it difficult to increase the Money Supply.

What does it mean to say that money is a stock concept?

We consider money to be a total amount available at any given time.

Why isn't money considered wealth or income?

Wealth is a stock concept, but it is too broad of a category. Income is a flow concept.

Time Deposits

also called Certificates of Deposit (CDs). A fixed-term (a few months to a few years) saving mechanism that promises a higher rate of interest.

Currency

coins and paper bills

Which monetary function is served by the possession of a Japanese Yen in the United States?

unit of account and store of value

demand deposits

held in an account at a bank and can be withdrawn, in cash or check form, rather easily

Which monetary function is served by a residential home?

store of value

other checkable deposits

such as Negotiable Order of Withdrawal accounts, which earn interest and can have checks written for them

savings deposits

Money that is easily accessible, but not via check.