Presentation on theme: "Lesson 9-1 Money. Defining Money The Functions of Money A medium of exchange is anything that is widely accepted as a means of payment. Money is anything."— Presentation transcript:
Defining Money The Functions of Money A medium of exchange is anything that is widely accepted as a means of payment. Money is anything that serves as a medium of exchange. In the absence of money, exchanges must be made by barter. Barter occurs when goods are exchanged directly for one another.
A unit of account is a consistent means of measuring the value of things. A store of value is the ability of an item to hold value over time. Because money is a store of value, it can be used as a standard of deferred payment. Money is not a risk-free store of value because inflation may erode its purchasing power.
Types of Money Money either has intrinsic value or it does not have intrinsic value. Commodity money has intrinsic value. Commodity money is money that has value apart from its use as money. The commodity use of money competes with the money use resulting in erratic fluctuations in the quantity available for the money use. Commodity money may vary in quality.
Gresham’s Law is the tendency for a lower-quality commodity (bad money) to drive a higher-quality commodity (good money) out of circulation. Fiat money has no intrinsic value. Fiat money is money that some authority, generally a government, has ordered be accepted as money. Currency and coin used in the United States is fiat money. Currency is paper money and coin issued by a government. Checkable deposits are fiat money.
A checkable deposit is a bank deposit whose ownership can be transferred with a check. A check is a legal document used to transfer the ownership of a checkable deposit. A debit card is an alternative way to transfer ownership of a checkable deposit.
Measuring Money The quantity of money in the economy at any one time is called the money supply. The liquidity of an asset is the ease with which it can be converted into currency. Currency is perfectly liquid. There are three different measures of money. M1 is currency in circulation, checkable deposits, and travelers’ checks.
M2 includes M1 and other deposits such as small time deposits (less than $100,000) and savings accounts, as well as accounts such as money market mutual funds (MMMFs) that place limits on the number or the amounts of the checks that can be written. M1 is the narrowest and most liquid of the measures of the money supply.