1 / 22

What is Money?

“Money is whatever is generally accepted in exchange for goods and services — a temporary abode of purchasing power to be used for buying still other goods and services.” -- Milton Friedman. What is Money?. Money is …

razi
Télécharger la présentation

What is Money?

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. “Money is whatever is generally accepted in exchange for goods and services — a temporary abode of purchasing power to be used for buying still other goods and services.” -- Milton Friedman

  2. What is Money? • Moneyis … • anything generally acceptable to sellers in exchange for goods and services. • a liquid asset is that can easily (i.e., quickly, cheaply, conveniently) be exchanged for goods and services.

  3. Functions of Money • Medium of exchange • Unit of account • Standard of Deferred Payment • Store of value

  4. Money: A Medium of Exchange • Money as a medium of exchange lowers transactions costs. • Trade without money, directly exchanging goods for goods, is barter. • Barter requires a double coincidence of wants • Barter is time-consuming and costly. • A medium of exchange must be: • Widely accepted for payment • Portable • Divisible

  5. Money: A Unit of Account • Money is a common unit of measurement. • Allows us to compare the values of dissimilar things. • Makes accounting possible. • Lowers information costs.

  6. Money: A Standard of Deferred Payment • Debt is denominated in money terms. • The standard for repayment is money. • There is a difference between money and credit: • Money is what you use to pay for goods and services. • Credit is debt, something you owe.

  7. Money: A Store of Value = Wealth • Money: one possible way to carry buying power forward into the future. • For money to be a store of value, it must be durableretain value over time. • Inflation reduces the effectiveness of money as a store of value. • High inflation can lead to currency substitution • the use of foreign money as a substitute for domestic money  dollarization

  8. M1 Money Supply: Means of Payment • Currency … the bills and coins we use. • Demand Deposits / Other Checkable Deposits … can be converted into currency and are used to settle debts. • Travelers Checks … accepted in payment for things

  9. In 2003, currency was 52% of M1. • U.S. currency is not backed by gold • It is backed by the confidence and trust of the public. • It is a fiduciary monetary system. (“Fiducia” means “trust” in Latin.) • Money backed by gold or silver (or something else) is commodity money. • Gresham’s Law: if two coins have the same face value but different intrinsic (commodity) values, the cheaper coin will be used and the other coin will be hoarded. • “Bad money drives out good.”

  10. M2: A Broader Definition of Money • M2 includes everything in M1 • Adds: • Savings deposits • Small denomination time deposits (CDs) • Retail money market mutual funds • M2 adds to M1less liquid assets that can easily be converted to M1 (means of payment)

  11. Financial Intermediaries That Hold Our Money 1)Commercial banks 2) Savings and loan associations 3) Savings banks and credit unions 4) Money market mutual funds

  12. U.S. Depository Institutions

  13. Deposit Insurance • Bank panic: depositors fear a bank will fail  rush to withdraw their $$  bank fails • Federal Deposit Insurance Corporation (FDIC – 1933) • A federal agency that insures bank deposits so that depositors do not lose their deposits if a bank fails.

  14. Bank Failures

  15. International Banking • Eurocurrency market or “offshore banking • A German firm may deposit Euros in a Tokyo bank • A U.S. firm may borrow dollars from a bank in London. • International Banking Facilities (IBFs) • a division of a U.S. bank that receives deposits from and make loans to nonresidents of the U.S. without the restrictions that apply to domestic U.S. banks.

  16. Fractional Reserve Banking • Banks keep less than 100 percent of deposits available for withdrawal. • They lend out the rest • An outgrowth of goldsmith practices.

  17. How Banks Create Money Reserves: Actual and Required • Reserve ratio: the fraction of a bank’s total deposits that are held in reserves. • Required reserve ratio: • must be kept on hand or on deposit with the Federal Reserve (the U.S. Central Bank) • Excess reserves are the cash reserves beyond those required • Excess reserves can be loaned.

  18. Multiple Creation of Bank Deposits  M1

  19. How Banks Create Money 1 Deposit Expansion Multiplier = Reserve Requirement (ratio)

More Related