1. Chapter 12
Money and banking
Economics, 8th Edition
Boyes/Melvin

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What is Money?
Money is anything that is generally acceptable to sellers in exchange for goods and services.
A liquid asset is an asset that can easily (i.e., quickly, cheaply, conveniently) be exchanged for goods and services.
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What is Money?
Functions of Money
Medium of exchange
Unit of account
Store of value
Standard of Deferred Payment
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Medium of Exchange (1)
The use of money as a medium of exchange lowers transactions costs.
Trade without money, directly exchanging goods for goods, is called barter.
Barter requires a double coincidence of wants—finding someone who wants what you have and who has what you want is time-consuming and costly.
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Medium of Exchange (2)
A medium of exchange must be:
Widely accepted for payment
Portable: easy to transport and transfer to the seller
Divisible: measurable in both small and large units
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Unit of Account
Money acts as a common unit of measurement, allowing for the comparison of the values of very dissimilar things.
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Store of Value
For money to be a store of value, it must be durable, able to retain value over time.
Inflation can reduce the effectiveness of money as a store of value.
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8. Standard of Deferred Payment
Debt is denominated in money terms.
The standard for repayment is money.
There is a difference between money and credit:
Money is what you use to pay for goods and services.
Credit is available savings that are lent to borrowers to spend.
Credit is debt, something you owe. Credit cards are not money!
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M1 Money Supply
M1 is the most liquid measure of the money supply.
M1 includes:
Currency
Travelers’ Checks
Demand Deposits (checking accounts)
Other Checkable Deposits (interest-bearing checking)
Demand Deposits and Checkable Deposits are called transactions accounts—checking accounts that can be drawn upon to make payments.
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About Currency
U.S. currency today is not backed by gold or silver.
Money backed by gold or silver (or something else of value) is called commodity money.
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11. Problems with Commodity Money
The precious metal in gold or silver coins may be worth more than the face value of the coins.
According to Gresham’s Law, if two coins have the same face value but different intrinsic (commodity) values, the cheaper coin will be used to make transactions and the other coin will be hoarded. “Bad money drives out good.”
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M2 money supply
M2 money supply includes the M1 money supply plus:
Savings deposits
Small denomination time deposits (CDs)
Retail money market mutual funds
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13. Financial Intermediaries
Financial intermediaries are firms that take deposits from households and firms and make loans to other households and firms.
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14. Financial Intermediaries
Four Types of Financial Intermediaries
1) Commercial banks
2) Savings and loan associations
3) Savings banks and credit unions
4) Money market mutual funds
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Deposit Insurance
To reduce the likelihood of bank panics, the Federal Deposit Insurance Corporation (FDIC) was created.
The FDIC insures bank deposits against losses up to $250,000 so that depositors do not lose their deposits if a bank fails.
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