Money Module 23

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 Exchange 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 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 Value 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 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 Account 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 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 Money What has served as money? What can serve as 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 What has served as money? What can serve as money?

Commodity Money With commodity money the medium of exchange is a good 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 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 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 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 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 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 Money Today, the US dollar is fiat 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 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 Money How well does the US dollar serve as 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 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 Supply 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 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

M1 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 M1 is a monetary aggregate that represents the most liquid form of money It consists of: Cash (all currency in circulation) Demand Deposits (checking accounts) Traveler’s Checks

M2 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 M2 includes additional relatively liquid assets, often referred to as near-moneys M2 Includes M1 Savings Accounts Certificates of Deposits Money Market Mutual Funds

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