Chapter 14

Money market deposit account

A person can also withdraw funds from a money market deposit account (MMDA), which is an interest-bearing account containing a variety of interest-bearing short-term securities. MMDAs, however, have a minimum-balance requirement and a limit on how often a person can withdraw funds.

Credit Cards and Money

The answer is that a credit card is not money. Rather, it is a convenient means of obtaining a short-term loan from the financial institution that issued the card.

Unit of Account

Society uses monetary units-dollars, in the US-as a yeardstick for measuring the relative worth of a wide variety of goods, services, and resources. Money aids rational decision making by enabling buyers and sellers to easily compare the prices of various goods, services and resources.

Money Definition M1

The narrowest definition of US money supply is called M1. It consists of two compentents: -Currency (coins and paper money) in the hands of the public. -All checkable deposits (all deposits in commercial banks and "thrift" or savings institutions on which checks of any size can be drawn).

Money supply

paper money and checkable deposits that are debts or promises to pay. Paper money is the circulating debt of the Federal Reserve Banks.

Currency: coins + paper money

The coins are issued by the U.S. Treasury while the paper money consists of Federal Reserve Notes issued by the Federal Reserve System (the U.S. central bank)

Wealth in other assets

these include real estate, stocks, bonds, precious metals such as gold, and even collectible items like fine art or comic books.

Money Definition M2

A second and broader definition of money includes M1 plus several near-monies. Near-monies are certain highly liquid financial assets that do not function directly or fully as a medium of exchange but can be readily converted into currency or checkable deposits. The M2 definition of money includes three categories of near-monies.

Commercial banks

Commercial banks (A firm that engages in the business of banking (accepts deposits, offers checking accounts, and makes loans).) are the primary depository institutions. They accept the deposits of households and businesses, keep the money safe until it is demanded via checks, and in the meantime use it to make available a wide variety of loans. Commercial bank loans provide short-term financial capital to businesses, and they finance consumer purchases of automobiles and other durable goods.

Institutions that offer checkable deposits

Commercial banks are the primary depository institutions. They accept the deposits of households and businesses, keep the money safe until it is demanded via checks, and in the meantime use it to make available a wide variety of loans. Commercial bank loans provide short-term financial capital to businesses, and they finance consumer purchases of automobiles and other durable goods. Savings and loan associations (S&Ls), mutual savings banks, and credit unions supplement the commercial banks and are known collectively as savings or thrift institutions, or simply "thrifts."

Credit Unions

Credit unions accept deposits from and lend to "members," who usually are a group of people who work for the same company.

Token Money

The face value of any piece of currency is unrelated to its intrinsic value - the value of the physical material (metal or paper and ink) out of hich that piece of currency is constructed.

Money as Debt

The major components of the money supply—paper money and checkable deposits—are debts, or promises to pay. In the United States, paper money is the circulating debt of the Federal Reserve Banks. Checkable deposits are the debts of commercial banks and thrift institutions. Paper currency and checkable deposits have no intrinsic value. A $5 bill is just an inscribed piece of paper. If the government backed the currency with something tangible like gold, then the supply of money would vary with how much gold was available. By not backing the currency, the government avoids this constraint and indeed receives a key freedom—the ability to provide as much or as little money as needed to maintain the value of money and to best suit the economic needs of the country. Its monetary authorities attempt to provide the Page 294 amount of money needed for the particular volume of business activity that will promote full employment, price-level stability, and economic growth.

Checkable Deposits

The safety and convenience of checks has made checkable deposits a large component of the M1 money supply. Moreover, people can convert checkable deposits into paper money and coins on demand; checks drawn on those deposits are thus the equivalent of currency.

Two Qualifications

We must qualify our discussion in two important ways. First, currency held by the U.S. Treasury, the Federal Reserve banks, commercial banks, and thrift institutions is excluded from M1 and other measures of the money supply. A paper dollar or four quarters in the billfold of, say, Emma Buck obviously constitutes just $1 of the money supply. But if we counted currency held by banks as part of the money supply, the same $1 would count for $2 of money supply when Emma deposited the currency into her checkable deposit in her bank. It would count for $1 of checkable deposit owned by Buck and also $1 of currency in the bank's cash drawer or vault. By excluding currency held by banks when determining the total supply of money, we avoid this problem of double counting. Also excluded from the money supply are any checkable deposits of the government (specifically, the U.S. Treasury) or the Federal Reserve that are held by commercial banks or thrift institutions. This exclusion is designed to enable a better assessment of the amount of money available to the private sector for potential spending.

liquidity

an assets liquidity is the ease with which it can be converted quickly into the most widely accepted and easily spent form of money, cash, with little or no loss of purchasing power.

Near-monies

are certain highly liquid financial assets that do not function directly or fully as a medium of exchange but can be readily converted into currency or checkable deposits. The M2 definition of money includes three categories of near-monies.

Medium of Exchange

money allows society to escape the complications of barter.