The Definition and Measurement of Money - Section 5, Module 23

money - any asset that can easily be used to purchase goods and services

• must be widely accepted by sellers for ease of use

• should be durable, portable, uniform, in limited supply, and divisible into smaller units

money = cash = HIGHLY liquid

currency in circulation (cash in the hands of the public) is money → so are bank deposits (bank accounts on which ppl can write checks or debit funds) → credit/debit

money supply - the total value of financial assets in the economy that are considered money

• 2 definitions:

• narrower definition considers only the most liquid assets as money: currency in circulation, traveler’s checks, and checkable bank deposits

• broader definition includes ^^^ + other assets that are almost checkable → ex saving accounts deposits that can be transferred to checking account easily

generates gain from trade bc it makes indirect exchange possible → trade what u have to offer for money, than trade money for what u want → basically j makes trade ez

• increases welfare

Roles of Money: medium of exchange, store of value, and unit of account

• medium exchange - an asset that individuals use to trade for goods and services rather than for consumption

• store of value - a means of holding purchasing power over time

• unit of account - the commonly accepted measure individuals use to set prices and make economic calculations

Types of Money

• commodity money - the medium of exchange had alternate uses as well (ex: gold, silver, cigarettes)

• commodity-backed money - a medium of exchange w no intrinsic value whose ultimate value was guaranteed by a promise that it could always be converted into valuable goods on demand

  • tied up fewer valuable resources

• fiat money - money whose value derives entirely from its official status as a means of exchange

  • doesn’t tie up any real resources

  • money supply can be managed based on economic needs

  • risk: counterfeiting & temptation to overprint = inflation

monetary aggregates - overall measures of the money supply

• two mon. agg. → diff btwn the two is based on the two diff definitions of money [broad v/s strict]

• known as M1 and M2

• M1 is narrowest = only contains currency in circulation (cash), traveler’s checks, and checkable bank depostits

• M2 = M1+near-money financial assets

  • near money assets pay interest but cash doesnt

  • near money pay higher interest rates than any IR on checkable bank deposits

• M1 is most liquid