Money
Anything that is generally accepted as payment for goods or services or in the repayment of debts
Currency
Paper money and coins
Wealth
Includes not only money but also other assets such as bonds, common stock, art, land, furniture, cars, and houses.
Income
A flow of earnings per unit of time
Money relative to Income
Money is a stock. It is a certain amount at a given point in time
Functions of Money
Medium of Exchange
Unit of Account
Store of Value
Medium of Exchange
Used to pay for goods and services.
The use of money as a medium of exchange promotes rconomic efficiency by minimizing the time spent in exchanging goods
Transaction Cost
The time spent trying to exchange goods or services.
Double Coincidence of Wants
They have to find someone who has a good or service they want and who also wants the goods or services they have to offer
How does Money Promote Economic Efficiency?
By eliminating time spent exchanging goods or services and promoting efficiency by allowing people to specialize in what they do best
Unit of Account
Used to measure value in an economy
How does Using Money as a Unit of Account lower Transacrion Costs?
By reducing the number of prices that need to be considered
Store of Value
Repository of purchasing power available over time.
Used to save purchasing power from the time income is received until the time it is spent
Why do People Hold Money at all?
Because it is the most liquid asset because it IS the medium of exchange
When are people more reluctant to hold money?
During inflation when the price level is increasing rapidly because money is rapidly losing value
Payments System
The method of conducting transactions in the economy
Commodity Money
Money made up of precious metals or other valuable commodity
Gold, Silver, Diamonds
Why does Commodity Money not work?
Metals are heavy and difficult to transport in large quantities
Fiat Money
Paper currency decreed by governments as legal tender (must be accepted as legal payment for debts)
Is Fiat Money convertible into coins or precious metals?
No
Checks
An instruction from you to your bank to transfer money from your account to someone else's account when they deposit the check
Why are checks important?
Allowed you to make purchases without having to carry large amounts of currency
How do checks improve economic efficiency?
By reducing transportation costs associated with the payments system
What are the downsides to checks?
Transferring money is timely and processing checks is costly
Electronic Payment
Allows you to quickly pay bills and allows you to make automatic recurring payments
E-Money
Money that exists only in electronic form, like devit cards
Stored Value Card
Prepaid Visa cards
Smart Card
Reloadable prepaid Visa cards
E-Cash
Paypal Accounts
M1
Most liquid assets:
Currency, checking account deposits, and traveler's checks
M1 Currency
Paper money and coins in the hands of the nonbank public, not including cash held in ATMs or bank vaults
Traveler's Check
A piece of paper resembling a check that is signed when purchased and signed again when used to make a payment
Early version of stored value cards
M1 Demand Deposits
Business checking accounts that do not pay interest, and traveler's checks issued by banks
M1 Other Checkable Deposits
All other checking deposits, mainly interest bearing personal checking accounts
M2
M1
+ small time deposits
+ savings deposits
+ money market deposit accounts
+ money market mutual funds
Small Time Deposits
Some term to maturity, penalty for early withdrawl
Small certificates of deposit
M2 Savings Deposits
Limited to 6 3rd party transactions per month
M2 Money Market deposit Accounts
Limited to 6 3rd party transactions per month, require higher minimum balance than other savings deposit accounts, higher interest rates
M2 Money Market Mutual Funds
Retail <$50,000
A pool of money market securities
Maturity < 1 year
People can buy shares
Returns depend on how well the portfolio performs
Higher interest than Money Market Deposit Accounts
Not issued by banks (Edward Jones)
No FDIC Insurance
What is larger, M1 or M2?
M2