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Money and Banking. “Money is whatever is generally accepted in exchange for goods and services — accepted not as an object to be consumed but as an object that represents a temporary abode of purchasing power to be used for buying still other goods and services.” -- Milton Friedman .
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“Money is whatever is generally accepted in exchange for goods and services—accepted not as an object to be consumed but as an object that represents a temporary abode of purchasing power to be used for buying still other goods and services.” -- Milton Friedman
What is Money? Money __________is anything that is generally acceptable to sellers in exchange for goods and services. A __________ __________ is an asset that can easily (i.e., quickly, cheaply, conveniently) be exchanged for goods and services. asset liquid
What is Money? Functions of Money 1) __________ of exchange 2) Unit of __________ 3) Store of __________ 4) Standard of Deferred __________ Medium account value Payment
Medium of Exchange (1) medium • The use of money as a __________ of __________(to make transactions) lowers transactions costs. • Trade without money, directly exchanging goods for goods, is called __________. • Barter requires a __________ __________ of __________—each party to the exchange has to want what the other has to trade. • Finding someone else who wants what you have to trade and who has what you want is time-consuming and costly. exchange barter double coincidence wants
Medium of Exchange (2) • A medium of exchange must be: • __________ __________ for __________ • __________ : easy to transport and transfer to the seller • __________ : measurable in both small and large units payment accepted Widely Portable Divisible
Unit of Account • Money acts as a common unit of measurement. • This allows us to compare the values of very dissimilar things. • It makes accounting possible. • As a result of these things, it lowers information costs.
Store of Value • Money makes it possible to carry buying power forward into the future. • Therefore, for money to be a store of value, it must be __________. • __________ is the ability to retain value over time. • __________ can reduce the effectiveness of money as a store of value. • This can lead to __________ __________—the use of foreign money as a substitute for domestic money when the domestic economy has a high rate of inflation. durable Durability Inflation currency substitution
Standard of Deferred Payment • Debt is denominated in money terms. • The __________ for __________ is money. • There is a difference between __________ and __________ : • __________ is what you use to pay for goods and services. • __________ is available savings that are lent to borrowers to spend. • __________ is __________, something you owe. Standard repayment money credit Money Credit Credit debt
M1 Money Supply Money in the United States Today consists of: • __________ is the bills and coins that we use. • __________ are also money because they can be converted into currency and are used to settle debts. Currency Deposits
What is Money?—M1 • M1 is the narrowest and most liquid measure of the money supply. • It includes financial assets that are immediately available for spending on goods and services. • M1 includes: • __________ • __________ Checks • __________ __________(checking accounts) • Other __________ __________(interest-bearing checking) • Demand Deposits and Checkable Deposits are called __________ __________ are checking accounts that can be drawn upon to make payments. Currency Travelers’ deposits Demand deposits checkable accounts transactions
About Currency • In 2003, currency was 52% of M1. • U.S. currency today is __________ backed by gold or silver. • It is backed only by the confidence and trust of the public. • It is a __________ monetary system. (“Fiducia” means “trust” in Latin.) • Money backed by gold or silver (or something else of value) is called __________ __________. NOT fiduciary commodity money
Problems with Commodity Money • At times, the precious metal in gold or silver coins may be worth more than the face value of the coins. • In such situations, the public will begin to hoard the coins.
What is Money?—M2 adds • M2 __________ to M1 less liquid assets that can be converted to M1 assets quickly and at low cost. • Includes everything in M1 • Adds: • __________ __________ • Small denomination time deposits (__________) • Retail money market __________ __________ Savings Deposits CDs mutual funds
Financial Intermediaries Intermediaries Financial __________ __________ are firms that take deposits from households and firms and make loans to other households and firms.
Financial Intermediaries Four Types of Financial Intermediaries 1) __________ banks 2) __________ and __________ __________ 3) __________ banks and __________ unions 4) __________ __________ __________ __________ Commercial Loan Savings Associations Credit Savings Money Market Mutual Funds
Financial Intermediaries Commercial banks • __________ __________ • Financial institutions that offer deposits on which checks can be written. The make loans to households and businesses. They are corporations. • Originally only commercial banks could offer (non-interest-bearing) checking accounts. • __________ __________ • Savings and Loan Associations, Credit Unions, Mutual Savings Banks. • Created to encourage saving, hence “thrift”. • Until 1980, these institutions could offer higher interest rates on savings accounts than banks. • Now “thrifts” can offer many of the same services as commercial banks. Thrift institutions
Deposit Insurance • A bank panic occurs when depositors, fearing a bank’s closing, rush to withdraw their funds. • To reduce the likelihood of bank panics, in 1933 the __________ __________ __________ __________(FDIC) was created. • This is a federal agency that insures bank deposits so that depositors do not lose their deposits if a bank fails. Federal Deposit Insurance Corporation
