Chapter 3
What Is Money?
1
Meaning of Money

Money (money supply)—anything that is
generally accepted in payment for goods
or services or in the repayment of debts;
a stock concept. Money supply is the total
amount of money available in the
economy. (stock)

Wealth—the total collection of pieces of
property that serve to store value (stock)

Income—flow of earnings per unit
of time (flow)
2
Functions of Money

Medium of Exchange—promotes economic efficiency by
minimizing the time spent in exchanging goods
and services. Facilitates specialization and division of
labor. A good medium of exchange







Must
Must
Must
Must
Must
be easily standardized
be widely accepted
be divisible
be easy to carry
not deteriorate quickly
Unit of Account—used to measure value in
the economy: assets, goods, services.
Store of Value—used to save purchasing power; allows
intertemporal substitution of income

most liquid of all assets but High inflation diminishes its “store of
value” function.
3
Evolution of the Payments System






Commodity Money: Gold, Silver, other precious
metals, certain stones, Cigarettes, etc.
Representative money that is backed 100 %
by precious metals (banknotes)
Fiat Money: No consumption or investment use:
intrinsically useless pieces of paper.
Checks
Electronic Payments: EFTs, wire trasfers.
E-money: Debit cards (POS), etc.
4
Definitions of Money

From most liquid (narrow) to the least
liquid (broad), M0, M1, M2, M2Y, M3..




M0 = paper currency and coins
M1 = M0+ Checking Accounts+ Traveler
Checks
M2 = M1 + Savings Accounts
M2Y = M2 + Forex Accounts
5
6
20
20
20
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
04
02
00
98
96
94
92
90
88
86
84
82
80
78
76
74
72
70
50
M2Y
1,000,000,000
100,000,000
10,000,000
1,000,000
100,000
M2Y
10,000
1,000
100
10
1
7
900000
800000
700000
600000
500000
M2Y (1987=100)
GDP DEFLATOR (1987=100)
400000
300000
200000
100000
0
1996
1997
1998
1999
2000
2001
2002
2003
2004
8
Dollarization and Monetary Transmission in Turkey, Erdem BAŞÇI Vice Governor Central Bank of
Turkey December 2006
Monetary Policy
90
80
ISE Bonds and Bills Market Benchm ark
Interest Rate (Com pound)
70
CBRT O/N Interest Rate (Com pound)
60
50
40
30
20
11/09/06
04/05/06
23/12/05
16/08/05
11/04/05
02/12/04
23/07/04
17/03/04
03/11/03
27/06/03
05/02/03
23/09/02
15/05/02
02/01/02
10
9
Asset Dollarization
Share of FX-Denominated Deposits in Total Deposits
%
43
41
39
37
35
33
31
29
Sep -0 6
Ju n - 0 6
M ar-0 6
D ec-0 5
Sep -0 5
Ju n - 0 5
M ar-0 5
D ec-0 4
Sep -0 4
Ju n - 0 4
M ar-0 4
D ec-0 3
25
Sep -0 3
27
Dollarization and Monetary Transmission in Turkey, Erdem BAŞÇI Vice Governor Central Bank of Turkey
10