1. What is Money
Ch 13

2. Functions of Money
Medium of exchange: Money can be used for buying and selling goods and services
Unit of account or standard of value: prices are quoted in dollars and cents
Store of value: Money allows us to transfer purchasing power from present to future. It is the most liquid (spendable) of all assets, a convenient way to store wealth

3. Characteristics of money
Portable
Uniform
Acceptable
Durable
Stable

4. Supply of Money
Narrow definition of money: M1 includes all currency and checkable deposits
Currency (coins + paper money) held by public
“token” money, which means its intrinsic value is less than actual value. The metal in a dime is worth less than 10¢
All paper currency consists of Federal Reserve Notes issued by Fed

5. Supply of Money
Checkable deposits are included in M1, since they can be spent almost as readily as currency and can easily be exchanged in to currency
Commercial banks are main source of checkable deposits for households and businesses
Thrift institutions also have checkable deposits

6. Supply of Money
Qualification: Currency and checkable deposits held by the federal government, Federal Reserve, or other financial institutions are not included in M1

7. Supply of Money M2= M1 + some near-monies which include:
Savings deposits and money market deposit accounts
Certificates of deposit less than $100000
Money market and mutual funds balances, which can be redeemed by phone calls, checks, or through the internet

8. Supply of Money
M3= M2 + large certificates of deposit $ or more

9. Supply of Money
Which definition is used? M1 will be used early in book, but M2 is watched closely by the Fed in determining monetary policy
M2 and M3 are important because they can easily be changed into M1 types of money and influence people’s spending of income

10. Supply of Money
The ease of shifting from M1, M2, and M3 complicates the task of controlling spendable money supply
Definition is important when the government tries to measure and control the money supply
Credit cards are not money, but their use involves short term loans; their convenience allows you to keep M1 balances low because you need less for daily purchases