Chapter 3: What is Money?

What are the Functions of Money? (3)

1. Medium of exchange 2. Unit of account 3. Store of value

What is Store of Value?

An item that people can use to transfer purchasing power from the present to the future

What is Money?

Anything that is generally accepted as payment for goods and services or the repayment of debt

What is Medium of Exchange?

Anything that is used to determine value during the exchange of goods and services

How do you find M1 (most liquid assets)?

Currency + Traveler's Checks + Demand Deposits+ Other Checkable Deposits

What is Income?

Flow of earnings per unit of time

Where are all the US Dollars?

Held by foreigners and criminals

How do you find M2?

M1 + Small Denomination Time Deposits + Savings Deposits and Money market Deposit Accounts + Money Market Mutual Fund Shares

How do you find Monetary Aggregate?

M1 + other assets that are not so liquid = M2

What is the equation for Barter Economy?

N(N-1)/2

What is Fiat Money?

Paper money decreed by governments

What is Wealth?

The total collection of pieces of property that serve to store value

T/F: Money is different from Wealth and Income

True

What is Unit of Account?

Used to measure value in the economy, reduces transaction costs

What is Commodity Money?

Valuable, easily standardized and divisible commodities (e.g. precious metals, cigarettes)