Money
assets that people are generally willing to accept in exchange for goods and services or for payment of debts.
Asset
anything of value owned by a person or firm
Commodity money
a good used as money that also has value independent of its use as money such as deerskin, if others were to accept it as a medium of exchange
Double coincidence of wants
for bartering, both the seller and buyer must have something that he or she wants in return
Point of money/ why does one need money?
by making exchange easier, money allows for specialization and higher productivity
What are the functions of money?
Any medium of exchange MUST follow fulfill four functions. It must be (1) a medium of exchange, (2) unit of account, (3) store of value, and (4)standard of deferred payment
Medium of Exchange
sellers must except the money in exchange for goods and services.
unit of account
each good has a single price rather than many prices/ gives buyers/sellers a unit of account- a way of measuring value in the econ in terms of money
store of value
money can be stored easily whereas food, if commodity money, cannot. Doesn't have to be used but could spend it in the future/ bonds, stocks, treasuries, real estate considered storable
Liquidity
ease of which an asset can be converted into the medium of exchange
standard of deferred payment
money can facilitate exchange at a a given point in time by providing a medium of exchange and unit of account./ serves as a standard of deferred payment in borrowing and lending
Five criteria make a good suitable for use as M of E
Acceptable, standardized, durable, valuable, divisible
Acceptable
usable by most people
standardized quality
any two units are identical 5 dollar bill is a five dollar bill anywhere
durable
value is not lost by spoilage
valuable
relative to its weight so large amounts of money can easily transported
divisible
goods are valued differently
Fiat money
mine, such as paper currency, that is authorized by a central bank or governmental body and that does not have to be exchanged by the central bank for gold or other commodity money
M1
narrowest definition of money; includes: currency, value of all checking accounts at banks, value of traveler's checks; used with the intention to buy and sell rather than to store
M2
broader definition of money; everything in M1 plus savings accounts, small denomination time deposits, non-institutional money market fund shares/ storable
two key points about money supply?
supply consists of both currency and checking account deposits
banks play an important role in the way the money supply increases or decreases
Reserves
Deposits that a bank keeps as cash in its vault or on deposit with the Federal Reserve
required reserves
reserves that a bank is legally required to hold, based on its checking account deposits
required reserve ratio
the minimum fraction of deposits banks are required by law to keep as reserves
Excess reserves
reserves that banks hold over above the legal requirement
simple deposit multiplier
the ration of the amount of deposits created by banks to the amount of new reserves
Bank Run
a situation in which many depositors simultaneously decide to withdraw their money from a bank
bank panic
a situation in which many banks experience runs at the same time
discount loans
loans the fed reserve makes to bank
discount rate
the interest rate the fed charges on discount loans
fractional banking system
a banking in which banks keep less than 100% of deposits as reserves