Module 23

• Money

  any asset that can easily be used to purchase goods and services
• Money supply

  the total value of financial assets in the economy that are considered money
• Medium of Exchange

  an asset that individuals acquire for the purpose of trading for goods and services rather than for their own consumption
• Cigarettes were used as a medium of exchange in WWII by POWs because smokers were very common then
• Store of value

  a means of holding purchasing power over time
• Unit of account

  a measure used to set prices and make calculations
• Roles of money include being a medium of exchange, a store of value, and a unit of account.
• Because they are more durable, metal coins make a better store of value than perishable values like sacks of grains or ice cream cones
• By measuring all transactions in the same unit of account, more trades occur and more gains from trade are captured
• Commodity money

  a good used as a medium of exchange that has intrinsic value in other uses
• In terms of commodity money, cigarettes served as money in WWII POW camps because many prisoners smoked; so it worked well. During the Middle Ages, peasants would pay "rent" to their landlord through harvest and crops.
• Commodity-backed money

  A medium of exchange with no intrinsic value whose ultimate value is guaranteed by a promise that it can be converted into valuable goods.
• Example of commodity-backed money: when issued, a commodity-backed one-dollar silver certificate could have been converted into silver.
• Fiat money

  A medium of exchange whose value derives entirely from its official status as a means of payment.
• Advantages of Fiat money

  1. No resources are unnecessarily used (only paper is needed)
  2. Money supply is easier to manage because it is solely based on the needs of the economy
• The validity of a USD bill (fiat money) as an official means of payment is proven by the hidden pattern behind the Lincoln Memorial as seen through a document verifier.
• The 3 main types of money are: commodity money, commodity-backed money, and fiat money.
• Money aggregate


  an overall measure of the money supply
• Different types of money aggregate include: M0 or MB, M1, M2, and sometimes M3
• M0

  Monetary Base - Currency (in circulation) & Bank reserves
• M1

  Narrowest money aggregate; includes the most liquid forms of money - cash, traveler’s checks, & checkable bank deposits.

  M1 = Currency in circulation, demand deposits, & savings accounts
• M2

  Broader money aggregate; starts with M1 & includes savings accounts, certificates of deposit, money market funds, & other less liquid money

  M2 = M1 + small denomination time deposits (certificate of deposits/CDs) + retail money market funds
• M3

  Federal reserve concluded this third aggregate as no longer useful in 2006

  M3 = M1 + M2 + Larger Time Deposits + Larger Liquid Assets