1. Copyright © 2003 by South-Western/Thomson Learning. All rights reserved. CHAPTER 2 Principles of Money

2. Copyright © 2003 by South-Western/Thomson Learning. All rights reserved. The Functions of Money $ Medium of Exchange A means of payment; something used in transactions to make payments Store of Value Something that retains its value if held Unit of Account The accounting unit or standardized measure of value in which prices are quoted

3. Copyright © 2003 by South-Western/Thomson Learning. All rights reserved. The Monetary Aggregates and Domestic Nonfinancial Debt as of August 2001 (in Billions of Dollars) M1 Currency in the hands of the public$ 562.4 Demand deposits at commercial banks 314.4 Other checkable deposits (Deposits that can be withdrawn by unlimited check writing) 257.4 Travelers’ checks 8.8 Total M1$ 1,142.9* M2 M1 plus Small savings and time deposits ($100,000), including money market deposit accounts $3,144.4 Individual money market mutual funds 997.6 Total M2$ 5,284.9* M3 M2 plus Large time deposits $804.5 Term repurchase agreements and term Eurodollars 586.9 Institutional money market mutual funds 997.6 Total M3 7,673.9* DFND Federal: Credit market debt of the U.S. government and state and local governments $3,349.0 Nonfederal: Corporate bonds, Mortgages, Consumer credit (including bank loans), other bank loans, commercial paper, other debt instruments 15,540.7 Total DNFD $18,889.7* *Numbers may not sum to totals because of rounding. SOURCE: Federal Reserve Statistical Release H.6 (508), Board of Governors of the Federal Reserve (November 1, 2001).

4. Copyright © 2003 by South-Western/Thomson Learning. All rights reserved. The Relative Size of the Monetary Aggregates and DNFD as of August 2001(in Billions of Dollars) 19 18 17 16 15 14 13 12 11 10 9 8 7 6 5 4 3 2 1 0 $5,284.9 $1,142.9 $7,673.9 $18,889.7 Billions of Dollars M1M2M3DNFD

5. Copyright © 2003 by South-Western/Thomson Learning. All rights reserved. The Monetary Aggregates and DNFD, 1960- 2001* 196019651970197519801985199019952001* $18,000 $15,000 $12,000 $9,000 $6,000 $3,000 0 Year *Through August 2001. M1 M2 M3 DNFD Billions of Dollars