Chapter 13
Chapter 13-1 Short-Run Economic Fluctuation
What is money?
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Money is any asset that can easily be used to purchase
goods and services.
Currency in circulation is cash held by the public.
Checkable bank deposits are bank accounts on
which people can write checks.
The money supply is the total value of financial assets
in the economy that are considered money.
Roles of money
 A medium of exchange is an asset that individuals
acquire for the purpose of trading rather than for their
own consumption.
 A store of value is a means of holding purchasing
power over time.
 A unit of account is a measure used to set prices and
make economic calculations.
The Definition and
Functions of Money
• Money is a highly liquid financial asset.
– Liquid – easily changeable into another good
or asset.
• Money serves as:
– A medium of exchange.
– A unit of account.
– A store of wealth.
Money as a Medium of Exchange
• Money facilitates exchange by reducing
the cost of trading.
• Without money, we would have to
barter.
Money As a Medium of
Exchange
• Money does not have to have any
inherent value to function as a medium of
exchange.
• All that is necessary is that everyone
believes that other people will exchange it
for their goods.
Money as a Unit of Account
• Money is used as a common denominator to
measure the relative values of goods and
services.
• Without money, we would have to measure
the value of goods and services in terms of
other goods and services.
• Money is a useful unit of account only if its
value relative to the average of all other
prices doesn’t change too quickly.
Money as a Store of Value
• Money is a financial asset that can be
used to store wealth (income that you
have saved and not consumed).
• As a store of wealth, money pays no
interest, but is perfectly liquid.
• Money’s usefulness as a store of
wealth depends on how will it maintains
its value.
Types of money
 Commodity money is a good used as a medium of
exchange that has other uses.
 A commodity-backed money is a medium of
exchange with no intrinsic value whose ultimate value is
guaranteed by a promise that it can be converted into
valuable goods.
 Fiat money is a medium of exchange whose value
derives entirely from its official status as a means of
payment.
Measuring the Money Supply
 A monetary aggregate is an overall
measure of the money supply.
 Near-moneys are financial assets that
can’t be directly used as a medium of
exchange but can readily be converted
into cash or checkable bank deposits.
M1
= $1,368.4 (billions of dollars), June 2005
The Federal Reserve uses
three definitions of the
money supply: M1, M2,
and M3.
M1 is equally split between
currency in circulation
and checkable bank
deposits
M2
= $6,510.0 (billions of dollars), June 2005
• The Federal Reserve uses
three definitions of the money
supply: M1, M2, and M3.
M2 has a much broader
definition: it includes M1, plus
a range of other deposits and
deposit-like assets, making it
about three times as large.
Credit Cards
• Is the Credit Card in your wallet Money?
– It is accepted everywhere(Medium of exchange)
– You get a bill (Unit of Account)