Chapter 3: What is Money?

FYI Are We Headed for a Cashless Society?

-Predictions of a cashless society have been around for decades, but they have not come to fruition -Although e-money might be more convenient and efficient than a payments system based on paper, several factors work against the disappearance of the paper system -Still, the use of e-money will likely still increase in the future

Monetary Aggregates:

-currency (only paper $ & coins of the nonbank public) -traveler's checks (only checks not issued by banks) -demand deposits (business checking accounts that do not pay interest and travelers checks) -other checkable deposits (interest bearing checking accounts held by households) M2 (adds to M1 other assets that are not so liquid) -small denomination time deposits (certificates of deposits with a denomination of less that $100,000 that can be redeemed w/o penalty only at a fixed matuirty date) -savings deposits (non transaction deposits that can be added or taken out at any time) -money market deposit accounts (similar to money market mutual funds but are issued by banks) -money market mutual fund shares (are retail accounts on which households can write checks)

M1 vs. M2

-if they move together, then use one to predict future economic performance and to conduct policy will be the same as using the other - if they DO NOT, then what one tells us is happening to the money supply might be quite differently from what the other would tell us *the choice of monetary aggregate is important for policymakers

Function of Money: Store of Value

-used to save purchasing power over time saves power from time income is received until the time it is spent other assets also serve this function (stocks, bonds, land, houses) Money is the most liquid of all assets but loses value during inflation

Function of Money: A medium of exchange must

1) be easily standardized 2) be widely accepted 3) be divisible; so that it is easy to "make change" 4) be easy to carry not deteriorate quickly

Meaning of money

:anything that is generally accepted in payment for goods or services or in the repayment of debts checks are accepted as payments for purchases, checking account deposits are considered money as well

Wealth

:the total collection of pieces of property that serve to store value it doesn't only include money but also other assets such as bonds, common stock, art , land, furniture, cars and houses

Function of Money: Unit of account

:used to measure value in the economy -reduces transaction costs by reducing the number of prices to be considered we measure the value of goods and services in terms of money, just as we measure weight in terms of pounds or distance in term of miles

The federal reserve's monetary aggregates

M1 (most liquid assets) = currency [only paper $ & coins of the nonbank public] + traveler's checks + demand deposits + other checkable deposits M2 (adds to M1 other assets that are not so liquid) = M1 + small denomination time deposits + savings deposits and money market deposit accounts + money market mutual fund shares

FYI Where Are All the U.S. Dollars?

The almost $4,000 of U.S. currency held per person in the United States is a surprisingly large number Who are holding these dollars? -Criminals Foreigners

Evolution of the Payments System: Checks

an instruction to your bank to transfer money from your account - allows transactions to take place w/o the need to carry around large amounts of currency -reduces transportation costs linked with payments system and improves efficiency -can be written for any amount up to the balance in the account -loss from theft is greatly reduced Two problems arise: *it takes time to get checks from one place to another *paper shuffling required to process checks is costly

Evolution of the Payments System: E-Money

money that exist only in electronic form: 1) debit card 2) stored value card: purchased for a preset dollar amount that the customer pays up font, like a prepaid phone card (smart card-computer chip that allows it to be loaded with digital cash from the owners bank account) 3) e-cash: used on the internet to purchase goods or services

Evolution of the Payments System: Fiat Money

paper money decreed by governments as legal tender (that it is accepted as a legal payment for debts) -not convertible into coins or precious metal *drawbacks of paper currency and coins are that they are easily stolen and can be expensive to in large amounts bc of their bulk

Evolution of the Payments System: Electronic Payment

pay bills electronically

Payments System

the method of transactions in the economy

liquidity

the relative ease and speed with which an asset can be converted into medium of exchange

Evolution of the Payments System: Commodity Money

valuable, easily standardized and divisible commodities (e.g. precious metals, cigarettes) *one problem with a system based on precious metals is that such form of money is very heavy and is hard to transport

inflation

when the price level is increasing rapidly

Medium of exchange

money in form of currency or check, used to pay goods and services -Promotes economic efficiency by minimizing time spent in exchanging goods and services (transaction cost) -Eliminates the trouble of finding a double coincidence of wants (reduces transaction costs) -Promotes specialization

currency

paper money and coins -one type of money

hyper inflation

when the inflation rate exceeds 50 % per month

Income

:flow of earnings per unit of time (a flow concept)