Money, Liquidity, and Money Supply

What is money?

An asset widely accepted for payment and settling debts.

What are money's three functions?

Medium of exchange, unit of account, and store of value.

What is a medium of exchange?

Something accepted to purchase goods and services.

What is a unit of account?

A common measure for expressing and comparing prices.

What is a store of value?

Something that transfers purchasing power into the future, although inflation may erode it.

What is liquidity?

How easily an asset converts to a means of payment without substantial cost or loss.

Which is more liquid: cash or real estate?

Cash; real estate usually takes time and money to sell.

What is M1?

A narrow U.S. money measure including currency held by the public and qualifying liquid deposits and balances.

What is M2?

M1 plus savings deposits, small time deposits, and qualifying retail money market mutual fund balances.

Does a credit card itself count as money?

No. It provides access to credit; it is not itself a monetary asset.

Are stocks, bonds, houses, and cars money?

Generally no; they are assets or goods, not standard money-supply components.

Why can inflation weaken money's store-of-value function?

Inflation reduces the amount of goods and services a fixed amount of money can buy.