Transcript Money and Banking - Holy Family University

Chapter 3: Money
Chapter Objectives
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Define money.
Describe the work or economic
functions that money performs.
Define barter and explain why it is
economically inefficient.
Explain why some forms of
commodity money are better than
others.
Explain why representative, credit,
and fiat money are supplanted
commodity money.
Define the money supply and explain
how and why it is measured.
Even Monkeys Understand Money
• Literally!
• http://www.nytimes.com/2005/06/05/magazi
ne/05FREAK.html?pagewanted=all
This is money too!
• http://nymag.com/news/features/tidedetergent-drugs-2013-1/
• http://www.myfoxla.com/story/22650044/cri
minals-use-tide-detergent-in-place-of-cash
Inefficiencies of Barter
• Requires satisfaction of the double
coincidence of wants
– Party one must have what party two desires, and
vice versa
• Pricing problems
– The number of prices of goods equals the number
of possible pairs
1. Of Love, Money, and Transactional Efficiency
Efficiencies of Money
Medium of
Exchange
• Facilitates trade
• Fulfills double
coincidence of
wants
Store of Value
• Stores
purchasing
power over
time
Unit of account
• Facilitates price
determination
Standard of
Deferred
Compensation
• Can be used to
denominate a
debt
2. Better to Have Had Money and Lost It Than to
Have Never Had Money at All
• Commodity money: Forms
of money that have intrinsic
value as a commodity
• For example, cigarettes
offer:
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Ease of authentication
Uniformity
Divisibility
Durability
Portability
Elasticity of supply
3. A Short History of Moolah
• The best medium of exchange combines:
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Ease of authentication
Uniformity
Divisibility
Durability
Portability
Elasticity of supply
• Money must be scarce, but it need not be rare
3. A Short History of Moolah
Key Takeaways
•The best medium of exchange combines ease of authentication,
uniformity, divisibility, durability, portability, and elasticity of supply.
•Gold is not necessarily the best type of money because its supply is
relatively inelastic.
•Being declared a legal tender may help a medium of exchange to circulate
but simply knowing that a thing is readily accepted in exchange can work
just as well.
4. Commodity and Credit Monies
Table 3.1 - A Taxonomy of
Money
4. Commodity and Credit Monies
• Gold’s monetary life had been extended by the
invention and widespread use of credit money
– Including banknotes and deposits
• Credit money was born when the goldsmiths, now
protobankers, discovered that they could issue notes
to a greater value than the gold they had on physical
deposit
4. Commodity and Credit Monies
• Types of Deposits:
– Demand deposit account - Pays no or relatively low
interest, but funds can be withdrawn at any time via
teller during banking hours
– Certificates of deposit - Pay relatively high interest but
either cannot be withdrawn at all before a prespecified date or can be withdrawn only if the
depositor suffers a penalty that wipes out much of the
interest earned
– Between those two extremes have emerged a variety
of hybrids
4. Commodity and Credit Monies
Variety of Hybrids:
Automatic Transfer
from Savings Account
(ATS)
An account that automatically moves funds from your savings
account if your checking account is depleted
Sweep Accounts
At the close of a bank’s business day, a computer program
sweeps balances out of checking accounts, invests them
overnight, and credits them (and the interest earned) back
the next morning just before the bank resumes business
Money Market Mutual Mutual funds that invest in short-term, or money market,
Fund
instruments
Different Measures of Money Supply used by the Federal
Reserve
M0
• Cash in
circulation
• MB - Bank
reserves
M1
• M0 +
• Demand
deposits
• Traveler’s
checks
M2
• M1 +
• Savings
deposits
• MM mutual
funds
M3 includes M2 as well as institutional time deposits, money market
mutual fund shares, repurchase agreements, and Eurodollars, but its
publication was discontinued by the Fed in