Chapter 3 What is Money?
Income
A flow variable
Hyperinflation
A situation in which inflation rate is higher than 50% per month
Money
A stock variable
Wealth
A stock variable and is a collection of all the goods and properties that have some market value. Ex: car, piece of land, house, stocks and bonds, etc.
True
All these items cannot be said to be money and so money and wealth are not the same
True
An increase in price level (higher inflation) reduce the purchasing power of money
Check
An instruction from the issuer to his or her bank to transfer money from our account to the account of the person on whose name the check has been issued
Commodity Money
Any "commodity" or "good" that can be used as money. Ex: precious metals are a very good candidate; has a value independent of its use as money. For example, gold, silver, or any other value commodity
Money
Anything that is accepted in exchange for goods and services or in the repayment of debts.
1. Avoids the double coincidence of wants 2. Lowers transaction cost 3. Promotes specialization and division of labor
As a medium of exchange,...
M2
Broader measure of money
"money supply"
By money, economists also mean...
Stock of a Variable
Certain amount measured at any given point in time
Money
Different from wealth and income
Barter Economy
Goods and services are exchanged for other goods and services directly
Currency
Is money but so are checks and demand deposits
Flow Variable
Measured per unit of time. For example, income is a flow variable, salary per week or per month
True
Money is just not currency.
Unit of Account
Money is used as a unit of measurement for the value of goods and services; avoids the need of expressing the price of a good in terms of all other goods in an economy; thus each good need to have just one price, expressed in terms of money; reduces transaction costs; helps with bookkeeping
Electronic Money (E-Money)
Money that exists only in electronic form, such as debit card, smart card, etc
Stock
One single point in time
Electronic Payment
Payments can be made over internet from your house
Inflation Rate
Percentage increase in the overall price level over a year
True
Some assets may require a brokerage fee and considerably longer time to be converted into medium of exchange, such as selling your house, or car
Flat Money
Such as paper currency; legally authorized by central bank or government, and is not convertible into gold or some other commodity money
Liquidity
The easier and faster it is to convert an asset into medium of exchange, the more liquid the asset is.
Money
The most liquid asset due to it being accepted as a medium of exchange
M1
The narrowest measure of money and is based on its function of medium of exchange
Medium of Exchange
The primary function of money is to make payments for exchange of goods and services; more efficient than barter economy
Transaction Cost
The time spent trying to exchange goods or services
Money Aggregates
The two measure of total money in the economy as defined by the Fed
Store of Value
Usually there is a gap between the times of earning and spending. Money can be used to save the purchasing power during this gap. Also, sometimes people want to save some money for unforeseen contingencies
Makes the transaction in large quantity much easier; Reduce the amount of transportation required; Lesser risk of being stolen than commodity money or flat money
What are the advantages of checks?
Loses value with rising prices, can easily be stolen, transporting in large quantities difficult
What is a disadvantage of flat money?
Do not even require a little effort since the payments are automatically deducted from provided account information
What is the advantage of electronic payments?
They can not be used everywhere, for example, a grocery store, or a gas station
What is the disadvantage of electronic payments?
