money module 23. what is money? 1) what is money? - medium of exchange - store of value - unit of...
Post on 14-Dec-2015
221 Views
Preview:
TRANSCRIPT
What is Money?1) What is Money? - Medium of Exchange - Store of Value - Unit of Account
2) Types of Money - Commodity - Commodity-backed - Fiat
3) The Money Supply - M1 - M2
• An asset that can easily be used to purchase goods and services
• Cash is the most liquid form of money – it is easily spent
• Liquidity represents how easy it is to convert an asset to cash
Medium of Exchange1) What is Money? - Medium of Exchange - Store of Value - Unit of Account
2) Types of Money - Commodity - Commodity-backed - Fiat
3) The Money Supply - M1 - M2
• Money’s most important function is as a medium of exchange
• Without money, trade would only be through barter, which requires a coincidence of wants
• The US dollar serves this purpose for several countries (e.g., Panama)
Store of Value1) What is Money? - Medium of Exchange - Store of Value - Unit of Account
2) Types of Money - Commodity - Commodity-backed - Fiat
3) The Money Supply - M1 - M2
• In low inflation, money can be a store of value – it holds its purchasing power over time
• When we leave cash in our sock drawer, we are counting on it keeping its value
Unit of Account1) What is Money? - Medium of Exchange - Store of Value - Unit of Account
2) Types of Money - Commodity - Commodity-backed - Fiat
3) The Money Supply - M1 - M2
• Using money to appropriately value something is using as a unit of account
• In medieval times, people used bushels of grain or hours of labor as units of account – the dollar is more flexible
Types of Money1) What is Money? - Medium of Exchange - Store of Value - Unit of Account
2) Types of Money - Commodity - Commodity-backed - Fiat
3) The Money Supply - M1 - M2
• What has served as money?
• What can serve as money?
Commodity Money1) What is Money? - Medium of Exchange - Store of Value - Unit of Account
2) Types of Money - Commodity - Commodity-backed - Fiat
3) The Money Supply - M1 - M2
• With commodity money the medium of exchange is a good– Gold, silver– The good itself has value
• In prison movies, cigarettes are often depicted as a commodity money
Commodity-backed Money1) What is Money? - Medium of Exchange - Store of Value - Unit of Account
2) Types of Money - Commodity - Commodity-backed - Fiat
3) The Money Supply - M1 - M2
• When paper money was first used, it was a commodity-backed money– Medium itself has no intrinsic value– Could be exchanged for a precious metal– Specie
• Allowed banks to begin keeping fractional reserves– The value of all paper notes did not have
to be kept in the bank
Commodity-backed Money1) What is Money? - Medium of Exchange - Store of Value - Unit of Account
2) Types of Money - Commodity - Commodity-backed - Fiat
3) The Money Supply - M1 - M2
• In the United States, “greenbacks” were eventually backed by federal gold reserves
• In order to expand the money supply, more gold needed to be mined and acquired
Fiat Money1) What is Money? - Medium of Exchange - Store of Value - Unit of Account
2) Types of Money - Commodity - Commodity-backed - Fiat
3) The Money Supply - M1 - M2
• Today, the US dollar is fiat money– It is the official medium of exchange– It is backed by the full faith and credit of
the US Government
• The US Government is “good for it”– Trillions of dollars worth of assets
• $11 Billion in reserves of gold
– Ability to tax
Fiat Money1) What is Money? - Medium of Exchange - Store of Value - Unit of Account
2) Types of Money - Commodity - Commodity-backed - Fiat
3) The Money Supply - M1 - M2
• How well does the US dollar serve as money?– Very well– Most $100 bills are held by investors
outside the United States
• What about giant stone disks?– Let’s See
Calculating the Money Supply1) What is Money? - Medium of Exchange - Store of Value - Unit of Account
2) Types of Money - Commodity - Commodity-backed - Fiat
3) The Money Supply - M1 - M2
• Having fiat money allows government to more easily influence the supply of money available– Monetary policy
• How do we calculate the supply of money in the United States?– Monetary aggregates
M11) What is Money? - Medium of Exchange - Store of Value - Unit of Account
2) Types of Money - Commodity - Commodity-backed - Fiat
3) The Money Supply - M1 - M2
• M1 is a monetary aggregate that represents the most liquid form of money
• It consists of:1. Cash (all currency in circulation)2. Demand Deposits (checking accounts)3. Traveler’s Checks
M21) What is Money? - Medium of Exchange - Store of Value - Unit of Account
2) Types of Money - Commodity - Commodity-backed - Fiat
3) The Money Supply - M1 - M2
• M2 includes additional relatively liquid assets, often referred to as near-moneys
• M2 Includes1. M12. Savings Accounts3. Certificates of Deposits4. Money Market Mutual Funds
top related