Money and Banking Ch. 2

What is money?

An asset that is widely accepted in exchange for good and services and for repayment of debt. It supports all exchanges in the economy.

What are the 3 functions of money?

Means of exchange, unit of account, store of value

As a means of exchange money…

Eliminates all inefficiencies of bartering because it allows for exchange without a double coincidence of wants

As a unit of account money…

Provides a standard of measure for good and services

As a store of value money…

is durable, liquid, holds values over time although the value may change over time with interest.

Define payment systems.

Payment systems is a network of institutions, technology, markets, and procedures, that allow money to move from payer to payee

What are the parts of the payment systems?

Currency, checks, and EFT (electronic funds transfer)

What are the 2 types of money?

Commodity money and fiat money

Commodity money

Has intrinsic value, value within itself apart from being money, like Gold.

Fiat Money

Has no intrinsic value, it has no value apart from being money, like the USD.

Examples of electronic payments:

Debit/credit cards, ACH Transfers, and digital wallets

How is money measured?

Using aggregates like M1 and M2 based on liquidity.

M1 measures

The most liquid: currency + checking accounts

M2 measures

Broader: savings accounts and near money assets

Why do different aggregates matter?

For policy analysis and understanding money supply. As well as helps guide interest rates and policy decisions.