Money: Summary Notes

What is Money?

• Money is anything generally accepted as payment for goods/services.

• Includes currency, transaction accounts, and traveler’s checks.

History of Money

• Began with bartering around 9000 BC.

• Early forms included rare seashells and metal pieces.

• Coins appeared around 600 BC in Lydia.

• Paper money was first printed in China around 1260.

• Modern banking evolved from the 17th century onwards.

• Digital payment systems emerged in the late 20th and early 21st centuries (e.g., PayPal, Apple Pay, Bitcoin).

Functions of Money

• Medium of Exchange: Facilitates buying/selling goods and services.

• Unit of Account: Measures and compares value.

• Store of Value: Accumulates wealth for future use.

Features of Money

• Durability: Must last long without losing value.

• Portability: Easy to carry.

• Divisibility: Can be divided into smaller denominations.

• Uniformity: Standardized in size, shape, and value.

Medium of Exchange

• Replaces inefficient barter systems.

• Reduces transaction costs.

Unit of Account

• Provides a measurable value for debt, tax, goods, and services.

• Comparable to a unit of length.

Store of Value

• Allows resources, goods, and services to be cashed out and value stored as money.

• Enables future use of stored value.

Commodities

• Raw materials like cotton, oil, gas, corn, wheat, oranges, gold, and uranium.

• Classified as agricultural, energy, or metal.

Interest Rate Calculations

• Calculating future value with interest rate:

  • Formula: $Principal * (1 + Interest Rate)^{Years}$

  • Example: $100 * (1 + 0.10)^1 = 110$

Fiat Money

• Currency not backed by commodities like gold or silver.

• Its value is determined by the issuing government.

• Examples: Turkish Lira, US Dollar, Chinese Yuan.

Advantages of Fiat Money

• If managed well, it functions as a store of value, medium of exchange, and unit of account.

• Governments control its creation, printing, and management.

Disadvantages of Fiat Money

• Unlimited supply can lead to inflation if central banks print too much (quantitative easing).

Money Supply

• Total amount of cash and equivalents circulating in an economy.

• Central banks influence money supply through policy changes.

• Tracking money supply helps manage inflation and deflation.

Measures of Money Supply

• M0: Physical currency and bank reserves.

  • $M0 = (Currency + Coins) + Central\ Bank\ Reserves$

• M1: Currency in circulation + demand deposits + saving accounts.

  • $M1 = Currency + Demand\ Deposits + Saving\ Accounts$

• M2: All of M1, retail money market shares, and savings deposits.

• M3: Not provided in transcript.

Additional Definitions

• Emisyon (Emission): Issuing paper money.

• Repo (Repurchase Agreement): Short-term sale agreement with repurchase clause.

• Para piyasası fonları (Money Market Funds): Investment funds created by banks.

• İhraç edilen menkul kıymetler (Issued Securities): Bonds and bills with maturities up to 2 years.

Assets and Deposits

• Asset: Anything of value owned.

• Deposits: Accounts with funds committed for a period, earning interest.

Banks

• Trade money through deposits and loans.

• Collect deposits and give credits.

• Essential for the economy.