Fnan 320: Ch. 3
Evaluation of payment system:
(1) Commodity Money (2) Fiat Money (3) Checks (4) E-money
Money One, M1
(1) Currency in the hands of the public (individuals plus nonbank institutions) or currency in circulation or currency (2) Demand deposits: checking account deposits held by institutions (3) Other checkable deposits: checking account deposits held by individuals (4) Traveler's checks
Criteria that must be met for a commodity to function as money:
(1) It's value must be easily ascertained (2) It must be widely accepted (3) It must be divisible (4) It must be easy to carry (5) It's value must not deteriorate over time
Money Two, M2
(1) M1 (2) Savings deposits (3) Small denomination time deposits (CD's of $100,000 or less) (4) Money market mutual funds held by individuals
Money Three, M3
(1) M2 (2) Large denomination time deposits (CD's of above $100,000) (3) Money market mutual funds held by institutions (4) Other less liquid assets
Functions of money:
(1) Medium of exchange (2) Unit of account -Measure of value -Standard of deferred payment (3) Store of value
Commodities used in the past as money:
(1) String of beads: by Native Americans (2) Tobacco and whiskey: by American Colonist (3) Cigarettes: by prisoners of war during WWII
Who holds all U.S. dollars?
(1) U.S. households, firms, and governments (2) Criminals (3) Foreign central banks (4) Foreign firms and individuals, especially in the countries where inflation is too high
Commodity Money
-Hard to ascertain the value -Heavy to carry -Value deteriorates over time -Not widely accepted -Indivisible
Fiat Money
-It is a legal tender decreed by the government -Its intrinsic value is less than its face value -Example: U.S. dollar, pound sterling, etc. -Easily stolen -Heavy to carry in case of transactions involving a high value
Checks
-It is an instruction from the holder of a bank account to the bank to transfer a certain amount from the account holder's account to the vender's account. -It is better than other previous forms of payment, but it involves some processing fees. (It is estimated at $10 billion annually for the U.S.)
Medium of exchange
As a medium of exchange, money is used to exchange goods and services. This function of money promotes economic efficiency by eliminating the need of double coincidence of wants. This function of money minimizes transaction costs; transaction cost = cost involved in a transaction, other than the price of the commodity. Holding money in pocket or putting it in a checking account is an example of the medium of exchange function of money.
Store of value
As a store of value, money is used to store purchasing power between the time income is received and the time it is spent. Although purchasing power can be stored in other asset forms, such as gold, silver, jewelry, land, house, stocks, bonds, etc., but money is the most liquid of all because other assets need to be converted into cash for making purchases. However, money loses its value during inflation while other assets may gain in value. Putting money in an account for future use is an example of store of value function of money.
Unit of Account
As a unit of account, money is used to express the value of goods and services. This function of money promotes economic efficiency and minimizes transaction costs by eliminating the need of expressing the price of each commodity in terms of every other commodity. Writing a price tag is an example of the unit of account function of money.
Standard definition of money:
Money is anything that is used in payment for goods and services, and repayment of debts.
What is money?
Money is what money does (it's function). Money is a matter with 4 functions; (1) a medium, (2) a measure, (3) a standard, and (4) a store of value.
E-Money
a. Debit card b. Stored value cards c. Smart cards d. E-cash
