Money
Module 23
What is Money?
1) What is Money?
- Medium of Exchange
- Store of Value
- Unit of Account
2) Types of Money
- Commodity
- Commodity-backed
- Fiat
3) The Money Supply
- M1
- M2
• An asset that can easily be used to
purchase goods and services
• Cash is the most liquid form of money
– it is easily spent
• Liquidity represents how easy it is to
convert an asset to cash
Medium of Exchange
1) What is Money?
- Medium of Exchange
- Store of Value
- Unit of Account
2) Types of Money
- Commodity
- Commodity-backed
- Fiat
3) The Money Supply
- M1
- M2
• Money’s most important function is as a
medium of exchange
• Without money, trade would only be
through barter, which requires a
coincidence of wants
• The US dollar serves this purpose for
several countries (e.g., Panama)
Store of Value
1) What is Money?
- Medium of Exchange
- Store of Value
- Unit of Account
• In low inflation, money can be a store
of value – it holds its purchasing
power over time
2) Types of Money
- Commodity
- Commodity-backed
- Fiat
3) The Money Supply
- M1
- M2
• When we leave cash in our sock
drawer, we are counting on it keeping
its value
Unit of Account
1) What is Money?
- Medium of Exchange
- Store of Value
- Unit of Account
2) Types of Money
- Commodity
- Commodity-backed
- Fiat
3) The Money Supply
- M1
- M2
• Using money to appropriately value
something is using as a unit of
account
• In medieval times, people used
bushels of grain or hours of labor as
units of account – the dollar is more
flexible
Types of Money
1) What is Money?
- Medium of Exchange
- Store of Value
- Unit of Account
2) Types of Money
- Commodity
- Commodity-backed
- Fiat
3) The Money Supply
- M1
- M2
• What has served as money?
• What can serve as money?
Commodity Money
1) What is Money?
- Medium of Exchange
- Store of Value
- Unit of Account
2) Types of Money
- Commodity
- Commodity-backed
- Fiat
3) The Money Supply
- M1
- M2
• With commodity money the medium
of exchange is a good
– Gold, silver
– The good itself has value
• In prison movies, cigarettes are often
depicted as a commodity money
Commodity-backed Money
1) What is Money?
- Medium of Exchange
- Store of Value
- Unit of Account
2) Types of Money
- Commodity
- Commodity-backed
- Fiat
3) The Money Supply
- M1
- M2
• When paper money was first used, it
was a commodity-backed money
– Medium itself has no intrinsic value
– Could be exchanged for a precious metal
– Specie
• Allowed banks to begin keeping
fractional reserves
– The value of all paper notes did not have
to be kept in the bank
Commodity-backed Money
1) What is Money?
- Medium of Exchange
- Store of Value
- Unit of Account
• In the United States, “greenbacks”
were eventually backed by federal
gold reserves
2) Types of Money
- Commodity
- Commodity-backed
- Fiat
3) The Money Supply
- M1
- M2
• In order to expand the money supply,
more gold needed to be mined and
acquired
Fiat Money
1) What is Money?
- Medium of Exchange
- Store of Value
- Unit of Account
2) Types of Money
- Commodity
- Commodity-backed
- Fiat
• Today, the US dollar is fiat money
– It is the official medium of exchange
– It is backed by the full faith and credit of
the US Government
• The US Government is “good for it”
– Trillions of dollars worth of assets
3) The Money Supply
- M1
- M2
• $11 Billion in reserves of gold
– Ability to tax
Fiat Money
1) What is Money?
- Medium of Exchange
- Store of Value
- Unit of Account
2) Types of Money
- Commodity
- Commodity-backed
- Fiat
3) The Money Supply
- M1
- M2
• How well does the US dollar serve as
money?
– Very well
– Most $100 bills are held by investors
outside the United States
• What about giant stone disks?
– Let’s See
Calculating the Money Supply
1) What is Money?
- Medium of Exchange
- Store of Value
- Unit of Account
2) Types of Money
- Commodity
- Commodity-backed
- Fiat
3) The Money Supply
- M1
- M2
• Having fiat money allows government
to more easily influence the supply of
money available
– Monetary policy
• How do we calculate the supply of
money in the United States?
– Monetary aggregates
M1
1) What is Money?
- Medium of Exchange
- Store of Value
- Unit of Account
• M1 is a monetary aggregate that
represents the most liquid form of
money
2) Types of Money
- Commodity
- Commodity-backed
- Fiat
3) The Money Supply
- M1
- M2
• It consists of:
1. Cash (all currency in circulation)
2. Demand Deposits (checking accounts)
3. Traveler’s Checks
M2
1) What is Money?
- Medium of Exchange
- Store of Value
- Unit of Account
• M2 includes additional relatively
liquid assets, often referred to as
near-moneys
2) Types of Money
- Commodity
- Commodity-backed
- Fiat
3) The Money Supply
- M1
- M2
• M2 Includes
1.
2.
3.
4.
M1
Savings Accounts
Certificates of Deposits
Money Market Mutual Funds
Problem