Transcript Document

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 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.