ECON Module 47 What is Money?

How is fiat money different from commodity money and representative money?

1. Commodity money has value apart from their use as money. For example, fish, furs, and precious metals had other important uses. 2. Representative money has no value of its own. For example, US currency was tied to a scarce resource such as gold or silver. 3. Fiat money has value simply because the government ordered it to have value.

What are six characteristics of money? Explain how U.S. currency satisfies each characteristic.

1. Durable -- does not wear out easily 2. Portable -- small & thin enough to fit in a pocket 3. Uniform -- a dollar will always equal a dollar; each unit is the same size and value 4. Divisible -- can divide U.S. money into smaller bills and coins (ex: If you pay a $10 bill for a lunch that cost $5.87, you can still receive $4.13 in change) 5. Limited Supply -- the national's central bank, the Federal Reserve, keeps tabs on the amount of money in circulation. It will mop up excess money. (If money is too available, it will lose value) 6. Accepted for Payment -- paychecks are in dollars and cents and is expected to be exchangeable to a bank or store

M2

A measure of the money supply that includes M1 along with forms of money that are less easily converted to cash. 1. M1 2. Deposits in savings accounts 3. Time deposits under $100,000, such as certificates of deposit 4. Money market deposit accounts -- similar to savings accounts, but higher interest rates 5. Balances in retail money market mutual funds

M1

A measure of the money supply that includes only the forms of money that are readily available to spend: cash, checking account deposits, and traveler's checks.

Money

Anything that is widely accepted in exchange for goods and services

Liquid assets

Assets that are easily converted to cash

Barter

Exchange of goods or services for other goods or services without the use of money

What characteristic distinguishes the types of money that are only part of M1 from the types of money that are added to form M2?

M1 contains only the forms of money that are readily available to spend. M2 includes M1 as well as assets that are less easily converted to cash.

Explain each of the three functions of money. Use an example in your explanations.

Money simplifies business transactions by serving as a: 1. Medium of exchange -- form of payment for whatever the buyer seeks Ex: U.S. currency for a t-shirt 2. A store of value -- Money is saved and will hold its value Ex: Checking accounts and investments 3. A unit of account -- Makes it easy to see how much each item costs -- Standard means of transaction -- Makes it possible to compare prices Ex: can compare the price of 1 gallon of milk in different stores

Representative money

Money that has no value of its own but can be exchanged for something of value.

Commodity money

Money that has value apart from its use as money

Fiat money

Money that has value because the government has ordered that it be accepted in payment of debts.

Currency

Paper money and coins

Repurchase agreements

Repos, which combine the sale of securities with an agreement to buy the securities back at a later date

Medium of Exchange

Something people acquire for the purpose of payment for goods and services

Store of value

Something that can be saved and will hold its value relatively well over time.

Unit of account

Standard measure used to set prices and make economic calculations.

Money supply

The amount of money available for the purchase of goods and services.