What is money? Ms. Ross As adapted from Federal Reserve Workshop
“ Money  is  what money  does .”
Why did money develop? <ul><li>Barter, swapping goods and services for other goods and services, is likely to be difficult...
Functions of Money <ul><li>Medium of Exchange </li></ul><ul><li>-- Money can be used for buying and selling goods and serv...
Functions of Money <ul><li>Store of value </li></ul><ul><li>-- Money can be used to transfer purchasing power from the pre...
Characteristics of “Good” Money <ul><li>Divisible </li></ul><ul><li>Relatively Scarce </li></ul><ul><li>Durable </li></ul>...
Money Definitions <ul><li>M1 </li></ul><ul><li>M2 </li></ul><ul><li>M3 </li></ul>
M1 – Money Definition <ul><li>M1 is the “narrowest” definition of money in the United States. </li></ul><ul><li>M1 is the ...
More on Components of M1 <ul><li>Coins + paper money </li></ul><ul><li>-- coins represent 2-3% of M1 </li></ul><ul><li>-- ...
More on Components of M1 <ul><li>Checkable Deposits </li></ul><ul><li>-- Checkable deposits represent about 50% of M1. </l...
M2 – Money Definition <ul><li>M2 is a “broader” definition of money and includes M1, plus a number of “near-monies”: </li>...
M3 – Money Definition <ul><li>M3 is an even “broader” definition of money and includes M2 and : </li></ul><ul><li>-- Large...
Commodity Money <ul><li>Commodity money is anything that serves as money and has an alternative use. </li></ul><ul><li>-- ...
Fiat Money <ul><li>Fiat money is any item, without intrinsic value, which has been declared to be money by the government....
Legal Tender <ul><li>Federal Reserve Notes are legal tender. </li></ul><ul><li>Legal tender means that paper currency must...
MV=PQ <ul><li>M: the supply of money in the economy </li></ul><ul><li>V: the velocity of money, or the number of times a y...
MV=PQ <ul><li>This is a simple model of a macro economy during a time period. </li></ul><ul><li>MV represents the total am...
MV=PQ <ul><li>If there is a change in one of the variables, there must be a change in one of the other variables to keep M...
Money and Prices <ul><li>There exists a negative relationship between prices and the value of the dollar. </li></ul><ul><l...
Money and Prices <ul><li>Very high levels of inflation can result in: </li></ul><ul><li>-- A breakdown in money’s function...
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What is money?

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Adapted from a presentation from the Philadelphia Fed

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What is money?

  1. 1. What is money? Ms. Ross As adapted from Federal Reserve Workshop
  2. 2. “ Money is what money does .”
  3. 3. Why did money develop? <ul><li>Barter, swapping goods and services for other goods and services, is likely to be difficult. </li></ul><ul><li>-- Barter requires a coincidence of wants. </li></ul><ul><li>-- Trade is slowed if there is no coincidence of wants </li></ul><ul><li>Many societies have used many things as money, including stones, shells, elephant tail bristles, gold and silver coins, furs, salt, whales’ teeth, and pieces of paper. </li></ul>
  4. 4. Functions of Money <ul><li>Medium of Exchange </li></ul><ul><li>-- Money can be used for buying and selling goods and services. </li></ul><ul><li>-- Money allows society to avoid the difficulties associated with barter. </li></ul><ul><li>Unit of Account </li></ul><ul><li>-- Money can be used to judge the relative value of different goods and services. </li></ul><ul><li>-- Money assists consumers and producers in making rational decisions. </li></ul>
  5. 5. Functions of Money <ul><li>Store of value </li></ul><ul><li>-- Money can be used to transfer purchasing power from the present into the future. </li></ul>
  6. 6. Characteristics of “Good” Money <ul><li>Divisible </li></ul><ul><li>Relatively Scarce </li></ul><ul><li>Durable </li></ul><ul><li>Portable </li></ul><ul><li>Desirable </li></ul><ul><li>Distinguishable </li></ul>
  7. 7. Money Definitions <ul><li>M1 </li></ul><ul><li>M2 </li></ul><ul><li>M3 </li></ul>
  8. 8. M1 – Money Definition <ul><li>M1 is the “narrowest” definition of money in the United States. </li></ul><ul><li>M1 is the “most liquid” </li></ul><ul><li>M1 includes </li></ul><ul><li>--Currency (coins and paper money) in the hands of the public </li></ul><ul><li>-- All checkable deposits (all deposits in commercial banks and savings institutions on which checks of any size can be drawn. </li></ul><ul><li>M1 = 1.372 trillion (as of March, 2008) </li></ul>
  9. 9. More on Components of M1 <ul><li>Coins + paper money </li></ul><ul><li>-- coins represent 2-3% of M1 </li></ul><ul><li>-- paper currency represents a little less than 50% of M1 </li></ul><ul><li>-- US coins in circulation are token money because the value of the metal in the coin is worth less than the value of the coin. </li></ul><ul><li>-- All paper money is in the form of Federal Reserve Notes </li></ul><ul><li>-- There is more than 700 billion in currency in circulation </li></ul>
  10. 10. More on Components of M1 <ul><li>Checkable Deposits </li></ul><ul><li>-- Checkable deposits represent about 50% of M1. </li></ul><ul><li>-- Checks and debit cards represent a convenient, safe way of transporting money and making payments. </li></ul><ul><li>-- People can generally convert checkable deposits quickly into paper money and coin. Therefore, checks drawn on these deposits are viewed as equivalent to currency . </li></ul>
  11. 11. M2 – Money Definition <ul><li>M2 is a “broader” definition of money and includes M1, plus a number of “near-monies”: </li></ul><ul><li>-- Savings deposits, including money market deposit accounts (MMDA’s) </li></ul><ul><li>-- small (less than $100,000) time deposits (CD’s) </li></ul><ul><li>These “near-monies” can be easily converted into currency and checkable deposits. </li></ul><ul><li>M2 = $7.6616 trillion ( March 2008) </li></ul>
  12. 12. M3 – Money Definition <ul><li>M3 is an even “broader” definition of money and includes M2 and : </li></ul><ul><li>-- Large ($100,000 or more) time deposits </li></ul><ul><li>-- Balances in institutional money funds </li></ul><ul><li>-- Repurchase liabilities issues by depository institutions </li></ul><ul><li>-- Eurodollars </li></ul><ul><li>M3 = $9.727 trillion (as of July 14, 2005) </li></ul>
  13. 13. Commodity Money <ul><li>Commodity money is anything that serves as money and has an alternative use. </li></ul><ul><li>-- Corn, tobacco, and salt are some examples of commodities that have been used as money at different times and places in the world. </li></ul><ul><li>-- Precious metals have also been used as commodity money </li></ul>
  14. 14. Fiat Money <ul><li>Fiat money is any item, without intrinsic value, which has been declared to be money by the government. </li></ul><ul><li>Federal Reserve Notes are fiat money; they have no intrinsic value. </li></ul>
  15. 15. Legal Tender <ul><li>Federal Reserve Notes are legal tender. </li></ul><ul><li>Legal tender means that paper currency must be accepted in payment of a debt, or else the creditor forfeits the privilege of charging interest and the right to sue the debtor for non-payment. </li></ul><ul><li>Coins and checks are not legal tender, yet they are widely accepted. </li></ul>
  16. 16. MV=PQ <ul><li>M: the supply of money in the economy </li></ul><ul><li>V: the velocity of money, or the number of times a year that the average dollar is spent on final goods and services </li></ul><ul><li>P: the overall price level in the economy </li></ul><ul><li>Q: the quantity of all goods and services produced; also known as real output </li></ul>
  17. 17. MV=PQ <ul><li>This is a simple model of a macro economy during a time period. </li></ul><ul><li>MV represents the total amount spent by buyers in the economy. </li></ul><ul><li>PQ represents the total amount received by sellers. </li></ul><ul><li>Therefore MV should be roughly equal to PQ </li></ul>
  18. 18. MV=PQ <ul><li>If there is a change in one of the variables, there must be a change in one of the other variables to keep MV equal to PQ. </li></ul>
  19. 19. Money and Prices <ul><li>There exists a negative relationship between prices and the value of the dollar. </li></ul><ul><li>-- Higher prices lower the value of the dollar because more dollars are needed to buy a particular amount of goods, services, or resources </li></ul><ul><li>-- Lower prices tend to raise the value of the dollar because fewer dollars are needed to buy a particular amount of goods, services, or resources. </li></ul>
  20. 20. Money and Prices <ul><li>Very high levels of inflation can result in: </li></ul><ul><li>-- A breakdown in money’s function as a medium of exchange. </li></ul><ul><li>-- A breakdown in money’s function as a store of value. </li></ul><ul><li>-- A breakdown in money’s function as a unit of account. </li></ul>
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