1. “Money is what money does.”

2. “ Money is a belief that has to be shared with other people….Otherwise money’s useless: you can’t eat or wear it, buy love with it (though you may broaden your chances), and you don’t take it with you when you die. Money can be anything you like-gold or silver, peas or paper, tiny shells or massive stones or nothing at all but surf on the electronic highway. But everyone must agree on what it is: we accept money because we believe others in turn will accept it too. It works because it works.” Jason Goodwin, Greenback, page 5

3. What is money? Functions and Characteristics of Money Definitions Commodity Money, Fiat Money, Legal Tender Money and Prices The Demand for Money The Money Market

4. Why Did Money Develop? Barter, swapping goods and services for other goods and services, is likely to be difficult Barter requires a coincidence of wants Trade is unlikely if there is no coincidence of wants Many societies have used many things as money, including : stones shells elephant tail bristles gold and silver coins furs salt whales’ teeth pieces of paper

5. Functions of Money Medium of exchange Money can be used for buying and selling goods and services Money allows society to avoid the difficulties associated with barter Unit of account Money can be used to judge the relative value of different goods and services Money assists consumers and producers in making rational decisions Store of value Money can be used to transfer purchasing power from the present into the future

6. Characteristics of “Good” Money Divisible It can be broken into smaller units Relatively scarce There is not as much of it as everyone wants Durable It lasts a long time Portable It is easy to carry Desirable It is something that people want Distinguishable It is easy to recognize and difficult to fake

7. Money Definitions M1 M2

8. Money Definitions – M1 M1 is the “narrowest” definition of money in the United States M1 includes: Currency (coins and paper money) in the hands of the public All checkable deposits (all deposits in commercial banks and savings institutions on which checks of any size can be drawn). Traveler’s checks M1= $1.386 trillion (as of June 2008)

9. More on the Components of M1 Coins and Paper Money Coins represent 2-3% of M1 Paper currency represents a little less that 50% of M1 U.S. coins in circulation are token money because the value of the metal in the coin is worth less that the value of the coin All paper money is in the form of Federal Reverse Notes There is more than $750 billion in currency in circulation

10. More on Components of M1 Checkable deposits Checkable deposits represent slightly less than 50% of M1 Checks represent a convenient, safe way of transporting money and making payments People can generally convert checkable deposits quickly into paper money and coin, therefore checks drawn on these deposits are viewed as equivalent to currency

11. Money Definition – M2 M2 is a “broader” definition of money and includes M1, plus a number of “near-monies” Savings deposits, including money market accounts (MMA) Small (less than $100,000) time deposits (CD’s) Money market mutual funds (MMMF’s) These “near-monies” can be easily converted into currency M2= $7.666 Trillion (as of 2008)

12. Commodity Money Anything that serves as money and has an alternative use Corn, tobacco, and salt are some examples of commodities that have been used as money at different times and places Precious metal have also been used as commodity

13. Fiat Money Any item without intrinsic value, which has been declared to be money by the government Federal Reserve Notes are fiat money; they have no intrinsic value "Fiat money is similar to representative money except it can't be redeemed for a commodity, such as gold or silver. The Federal Reserve notes we use today are an example of fiat money." [

14. Legal Tender Federal Reserve notes are legal tender Legal tender means that paper currency must be accepted in payment of a debt, or else the creditor forfeits the privilege of charging Coins and checks are not legal tender, yet they are widely excepted.

15. Money and Prices Inflation is a rise in the general level of prices Disinflation is a reduction in the level of inflation Deflation is a decline in the general level of prices We CAN MEASURE THE GENERAL LEVEL OF PRICES WITH THE CONSUMER PRICE INDEX (CPI)

16. Money and Prices Very high levels of inflation can result in a breakdown in money’s function as a medium of exchange A breakdown in money’s function as a store of value A breakdown in money’s function as a unit of account

17. The Demand for Money Transactions Demand for Money People hold money because it is convenient for purchasing goods and services Transactions demand for money varies directly with nominal GDP Asset Demand for Money People hold their financial assets in many forms including corporate stock, bonds, and money Asset demand varies inversely with interest rates