Transcript What Is Money? Chapter 3 Meaning of Money Money (=money supply) any vehicle used as a means of exchange to pay for goods, services or.

What Is
Money?
Chapter 3
Meaning of Money
Money (=money supply) any vehicle used
as a means of exchange to pay for goods,
services or debts.
 In today’s society, any asset that can
quickly be transferred into cash is
considered money.
 The more liquid an asset is, the closer it is
to money.
 In economics,money does not mean wealth
nor does it mean income.
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Functions of Money
 Medium
of exchange
 Unit of Account
 Store of Value
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Medium of exchange
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By eliminating barter, this function of money
increases efficiency in a society.
As human societies started to engage in
exchange money had to be invented.
Any technological change that reduces
transaction costs increases the wealth of the
society.
Any technological change that allows people
to specialize also increases wealth.
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Unit of Account
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We use money to measure the value of goods
and services.
Suppose we had 4 goods and no money. How do
we measure the price of each good?
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A in terms of B
B in terms of C
C in terms of D
A in terms of C
A in terms of D
B in terms of D
N!/2(N-2)!
Money allows to quote prices in terms of currency
only.
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A Proposed Unit of Account
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We could [have] labels providing a product or service’s
“daily energy calories.” Along with physical labels,
imagine a smartphone app — we’ll call it “Decal” for
short — that would scan a product’s bar code and report
how much energy it took to produce that item.
Like the nutritional data on the backs of food products,
Decal would give consumers a user-friendly, universal
measure that they could use to compare products or
count their daily energy intake.
http://www.nytimes.com/2011/03/09/opinion/09Little.html?partner=rss&emc=rss
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Store of Value
All assets are stored value.
 Money, although without any return, is still
desirable to hold because it allows
purchases immediately.
 Other assets take time (transaction costs)
to use as a payment for purchases.
 The more liquid an asset is, the less
transaction cost it carries.
 Inflation erodes the value of money.
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Evolution of the Payments
System
Commodity Money: valuable, easily
standardized and divisible commodities
(e.g. precious metals, cigarettes).
 Fiat Money: paper money decreed by
governments as legal tender.
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Electronic Money
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Debit Cards
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Stored Value Card
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Gift cards.
Electronic Cash
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Instant transfer from your checking account to
merchant’s checking account.
Account set up on a person’s PC from her bank
whereby she can buy products over the
Internet.
Electronic Checks
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Checks written on PC and sent through the
Internet.
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Benefits of Paper Checks
Cheaper than telecommunications network.
 Provide receipts.
 Allow float.
 May be more secure; avoid hacker
problems.
 Do not leave a wealth of information trail.
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Measuring Money
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M1: Currency, demand deposits, travelers
checks.
M2: M1, saving deposits, small time deposits,
retail MMMF.
M3: M2, large time deposits, repos,
Eurodollar deposits, institutional MMMF.
MZM: M2, institutional MMMF minus small
time deposits.
Growth rates of these aggregates do not
always go hand in hand, making monetary
policy difficult since signals are conflicting.
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http://research.stlouisfed.org/publications/mt/page16.pdf
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Measuring Money
M1: The sum of currency held outside the vaults of depository institutions, Federal Reserve Banks, and the U.S. Treasury;
travelers checks; and demand and other checkable deposits issued by financial institutions (except demand deposits due to the
Treasury and depository institutions), minus cash items in process of collection and Federal Reserve float.
MZM (money, zero maturity): M2 minus small-denomination time deposits, plus institutional money market mutual funds (that
is, those included in M3 but excluded from M2). The label MZM was coined by William Poole (1991); the aggregate itself was
proposed earlier by Motley (1988).
M2: M1 plus savings deposits (including money market deposit accounts) and small-denomination (under $100,000) time
deposits issued by financial institutions; and shares in retail money market mutual funds (funds with initial investments under
$50,000), net of retirement accounts.
M3: M2 plus large-denomination ($100,000 or more) time deposits; repurchase agreements issued by depository institutions;
Eurodollar deposits, specifically, dollar-denominated deposits due to nonbank U.S. addresses held at foreign offices of U.S.
banks worldwide and all banking offices in Canada and the United Kingdom; and institutional money market mutual funds
(funds with
initial investments of $50,000 or more).
Bank Credit: All loans, leases, and securities held by commercial banks.
Domestic Nonfinancial Debt: Total credit market liabilities of the U.S.Treasury, federally sponsored agencies, state and local
governments, households, and nonfinancial firms. End-of-period basis.
Adjusted Monetary Base: The sum of currency in circulation outside Federal Reserve Banks and the U.S. Treasury, deposits
of depository financial institutions at Federal Reserve Banks, and an adjustment for the effects of changesin statutory reserve
requirements on the quantity of base money held by depositories. This series is a spliced chain index; see Anderson and
Rasche (1996a,b, 2001, 2003).
Adjusted Reserves: The sum of vault cash and Federal Reserve Bank deposits held by depository institutions and an
adjustment for the effects of changes in statutory reserve requirements on the quantity of base money held by depositories.
This spliced chain index is numerically larger than the Board of Governors’ measure, which excludes vault cash not used to
satisfy statutory reserve requirements and Federal Reserve Bank deposits used to satisfy required clearing balance contracts;
see Anderson and Rasche (1996a, 2001, 2003).
Monetary Services Index: An index that measures the flow of monetary services received by households and firms from their
holdings of liquid assets; see Anderson, Jones, and Nesmith (1997). Indexes are shown for the assetsincluded in M2, with
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additional data at research.stlouisfed.org/msi/index.html.
http://research.stlouisfed.org/publications/mt/notes.pdf
Measures of the Monetary
Aggregates
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Source: http://research.stlouisfed.org/publications/mt/page4.pdf
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Reliability of the Money Data
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Revisions are issued because:
Small depository institutions report
infrequently
 Adjustments must be made for seasonal
variation
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We probably should not pay much
attention to short-run movements in the
money supply numbers, but should be
concerned only with longer-run
movements
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Growth Rate of M2: Initial and
Revised Series, 2008 (%, annual rate)
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