Money and Banking

1. Money and Banking It’s finally March Money Month!

2. Functions of Money • 1. Medium of Exchange • 2. Store of Value • 3. Unit of Account/Standard of Value • Cuts down on “transaction costs” that result from bartering • (i.e., overcomes the challenge of “double coincidence of wants”). Will trade cheese for towels. Will trade towels for cheese.

3. Types of Money • 1. Commodity Money • When the medium of exchange is a good. • Examples: gold, salt, cowry shells

4. Types of Money • 2. Commodity-Backed Money • Derives value from the promise that it is “backed up” by a good. • Guarantee: convert money into commodity on command. • Example: Silver Dollars

5. Types of Money • 3. Fiat Money • Value comes from our faith in the notion that we can use it: • as a medium of exchange • to store value over time • as a unit of account, a standardized value

6. Types of Money • 3. Fiat Money • Value comes from our faith in the notion that we can use it: • as a medium of exchange • to store value over time • as a unit of account, a standardized value • Value derived “entirely from its official status as a means of exchange” • Government fiat

7. Money Aggregates: M1 vs. M2 Liquidity: used to describe assets that can quickly be converted into cash Easily converted (exchanged) with low transaction cost and minimal nominal loss of value

8. Money Aggregates: M1 vs. M2 What is the most liquid asset? What is the opportunity cost of holding it?

9. Money Aggregates: M1 vs. M2 • M1: • Currency in circulation: minted coins and paper money • Traveler’s checks • Checkable bank deposits: checking accounts • All of these can directly be used as a medium of exchange, so M1 is very liquid.

10. Money Aggregates: M1 vs. M2 Fun Fact: Most U.S. currency does not circulate within U.S. borders

11. Money Aggregates: M1 vs. M2 • M2: • M1 • Near-Moneys (~indirect cash because easily converted) • Savings accounts • Money market funds • Time deposits (like CDs)

12. Money Aggregates: M1 vs. M2