The Meaning of Money

The Meaning of Money

• Medium of Exchange

  • An item that buyers give to sellers when they want to purchase goods and services.

• Unit of Account

  • A yardstick people use to post prices and record debts.

The Meaning of Money

• Store of Value
  • An item that people can use to transfer purchasing power from the present to the future.

The Meaning of Money

• World Without Money
  • Barter system
  • Double coincidence of wants
    • In a barter system, trade requires a double coincidence of wants, where each party has something the other wants.

Two Kinds of Money

• 1. Commodity Money
  • Money that takes the form of a commodity with intrinsic value.
    • Intrinsic value: The item would have value even if it were not used as money.
  • Examples:
    • Gold standard: Paper money that is convertible into gold on demand.

The Kinds of Money

• 2. Fiat Money
  • Money without intrinsic value.
    • Fiat: by order or decree.
  • Used as money because of government decree.

Measures of Money Supply

• Measures of money stock
  • M1
    • Currency
    • Demand deposits
    • Other checkable deposits
    • Traveler’s checks
  • M2
    • Everything in M1
    • Savings deposits
    • Small time deposits
    • Money market mutual funds
    • A few minor categories

Figure 1 Two Measures of the Money Stock for the U.S. Economy