Presentation on theme: "Module 23-Functions of Money and the Money Supply"— Presentation transcript:
1 Module 23-Functions of Money and the Money Supply J.A.SACCO
2 Module Outline The Functions of Money Monetary Standards, or What Backs MoneyDefining the U.S. Money Supply
3 Did You Know That...The typical dollar bill changes hands 50 times a year?Cash, of course, is not the only thing we use as money.
4 MoneyMoneyAnything that people generally accept in exchange for goods and services
5 Types of Money Iron Boar tusk Playing cards Copper Red woodpecker scalps LeatherBrass Feathers GoldWine Glass SilverCorn Polished beads (wampum) KnivesSalt Rum PotsHorses Molasses BoatsSheep Tobacco PitchGoats Agricultural implements RiceTortoise shells Round stones with centers removed CowsPorpoise teeth Crystal salt bars PaperWhale teeth Snail shells Cigarettes
6 The Functions of Money The functions of money are: 1) Medium of exchange2) Unit of accounting3) Store of value (purchasing power)4) Standard of deferred payment
7 The Functions of Money Advantages of Money over Bartering? Medium of ExchangeAny asset that sellers will accept as paymentBarterThe direct exchange of goods and services for other goods and services without the use of moneyAdvantages of Money over Bartering?
8 The Functions of Money Medium of Exchange- Advantages over Bartering Money reduces transactions costsMeans-of-payment uncertaintyEliminates problem of the double coincidence of wantsMakes specialization easier
9 Functions of Money Unit of Accounting A measure by which prices are expressedThe common denominator of the price systemA central property of moneyA unit of accounting is an agreed-upon measure for stating the prices of goods and services.Table shows how a unit of account simplifies price comparisons.
10 The Functions of Money Store of Value A store of value is any commodity or token that can be held and exchanged later for goods and services.The more stable the value of a commodity or token, the better it can act as a store of value and the more useful it is as money.
11 The Functions of Money Standard of Deferred Payment A property of an asset that makes it desirable for use as a means of settling debts maturing in the futureAn essential property of money
12 Characteristics of Money PortabilityUniformityAcceptabilityDurabilityDivisibilityStability
13 The Functions of Money Liquidity The degree to which an asset can be acquired or disposed of without much danger of any intervening loss in nominal value and with small transaction costsMoney is the most liquid asset.
14 The Functions of Money Question: Answer: What is the cost of holding money?Answer:The loss of interest you would receive in a bank
15 Monetary Standards, or What Backs Money QuestionsWhat backs money?Is it gold, silver, or the federal government?AnswerConfidence
16 Monetary Standards, or What Backs Money Fiduciary Monetary System (Fiat Money)Objects that are money because the law decrees or orders them to be money.The currency is issued by the government and its value is based uniquely on the public’s faith that the currency represents command over goods and services.
17 How Do You Measure Money? Two MethodsM1-Transaction Approach“money as a mediumof exchange”M2- Liquidity Approach“money as a temporarystore of value”
18 Defining the U.S. Money Supply The Transaction Approach: M11) Currency2) Checkable (transaction) deposits3) Traveler’s checks
19 Defining the U.S. Money Supply CurrencyMinted coins and paper currency not deposited in financial institutionsLargest percentage of M12/3 held by foreigners a change since the 1990’s WHY?
20 Defining the U.S. Money Supply Checkable DepositsAny deposits in a thrift institution or a commercial bank on which a check may be writtenThrift InstitutionFinancial institutions that receive most of their funds from the savings of the public
21 Defining the U.S. Money Supply Travelers ChecksFinancial instruments purchased from a bank or a nonbanking organization and signed during purchase that can be used as cash upon a second signature by the purchaser
22 Defining the U.S. Money Supply Currency- 53.9%/ $759.6 B.Checkable/Demand Deposits- 45.6%-$642.3B.Travelers Checks- .5%- $6.3B.Does this seem too little?
23 Defining the U.S. Money Supply Are Credit Cards Money?NO!- Defer rather than complete transactionsAre Debit Cards Money?NO!- Instruction to bank to transfer funds
24 Defining the U.S. Money Supply The Liquidity Approach: M2M2 = M1 + (near money) savings deposits and small denomination time deposits+ overnight repurchase agreements+ overnight Eurodollars deposits+ retail money market mutual funds+ money market deposit accounts
25 Defining the U.S. Money Supply Near MoniesAssets that are almost moneyHighly liquid
26 Defining the U.S. Money Supply Savings DepositsInterest-earning funds that can be withdrawn at any time without payment of a penalty
27 Defining the U.S. Money Supply Time DepositA deposit in a financial institution that requires notice of intent to withdraw or must be left for an agreed period.Early withdrawal may result in a penaltyCertificates of Deposit
28 Defining the U.S. Money Supply Money Market Deposit Accounts (MMDAs)Accounts issued by banks yielding a market rate of interest with a minimum balance requirement and a limit on transactions
29 Defining the U.S. Money Supply Repurchase Agreement (REPO, RPs)An agreement made by a bank to sell Treasury or federal agency securities to its customers, coupled with an agreement to repurchase them at a price that includes accumulated interestAllows businesses to dump excess cash instead of leaving in non-interest bearing accounts
30 Defining the U.S. Money Supply Eurodollar DepositsDeposits denominated in U.S. dollars but held in banks outside the United States
31 Defining the U.S. Money Supply Money Market Mutual FundsFunds of investment companies that obtain funds from the public that are held in common and used to acquire short-maturing credit instruments
32 Review M1 and M2 Official Measures of Money: M1 and M2 M1 M2 Currency and traveler’s checks plus checkable deposits owned by individuals and businesses.M2M1 plus savings deposits and small time deposits, money market funds, and other deposits.
33 M1 and M2 Figure shows two measures of money. M1 Currency and traveler’s checksCheckable deposits
38 M1 or M2? You receive a cash gift of $500 from a rich uncle. You open a checking account with a deposit of $400, the money you earned over the summer.You receive $600 from the sale of a painting and deposit the money in a savings account.You purchase a $50 U.S. savings bond.You write a check to pay for your college tuition.If you totaled the M1 and the M2, which would be greater? Is this always true?