money supply & types of money

define commodity money

valuable, easily standardised and divisible commodities

fiat money

money that is issued/authorised by government and declared legal tender, rather than being backed by physical commodity

what backs fiat money

trust and faith in the issuing government and the expectation that others will accept it

is a credit card money

no

why isn’t a credit card money

it provides a short-term loan/credit facility and does not itself increase M1, M2 or M3

what does a credit card mainly do

postpone payments when you use it

what are forms of money

M0, M1, M2, M3

what is M0

• monetary base and is currency (cash and coins) in circulation

• ply commercial banks’ required reserve balances at the central bank

• excess cash reserves held at the central bank

what is M1

• currency (M0)

• demand deposits (checkable deposits held with commercial banks)

• travellers’ cheques and other liquid deposits

what is M2

M1 + savings deposits (3 month or 6 month fixed deposit), money market securities, mutual funds and other time deposits

what is M3

M2 + large-time deposits, institutional money market funds, short-term repurchase agreements (repo), and larger liquid assets

what influences how much money people want to hold

• the price level (inflation)

• the nominal interest rate

• real GDP

• financial innovation

liquidity

the ease with which an asset can be converted quickly into cash with little or no loss of purchasing power