Macroeconomics 6 - What is Money? For us Money is anything that serves the three functions of money: 1. Money PDF

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Summary

What is Money?
For us Money is anything that serves the three functions of money:
1. Money as a Medium of Exchange
2. Unit of Account
3. Store of Value
Everything is money, but some things are better money than others
Money as a Medium of Exchange
Definiti...

Description

Macroeconomics 6/4/17 What is Money? For us Money is anything that serves the three functions of money: 1. Money as a Medium of Exchange 2. Unit of Account 3. Store of Value Everything is money, but some things are better money than others Money as a Medium of Exchange Definition: An asset used in purchasing goods and services is called a medium of exchange. Definition: The direct trade of goods and services for other goods and services is called barter.

Money and its Uses Money serves as a medium of exchange. This is a crucial function of money since it suppresses the problem of double coincidence of wants (each party involved in a trade must want what the other has to trade) that exists with barter.

Money as a Unit of Account Definition: a basic measure of economic value is called a unit of account. Money is used as a yardstick for measuring economic value.

Money as a store of value Definition: an asset that serves as a mean of holding wealth is called a store of value. Keeping balances on a checking account means that part of your wealth is kept as money.

Many things could be used as money: In ancient Ireland cows are said to have been used. How well do cows serve the three purposes of money?

 Medium of Exchange  Unit of Account  Store of Value Today there are many things that can (and do) serve the purposes of money: Medium of Exchange/Unit of Account/Store of Value Examples:       

Cash Checking account balances Stocks Bonds Gold Comic books Cows Which of these should we call “Money”?

 Any or all of these serve the functions of money, so all are “Money”  But some are better at the functions than others – they are better at being Money  So, we have various definitions of money depending on how well the items serve the functions of money – primarily the medium of exchange function

Money definitions ordered by Liquidity: M0: Really easy to spend Notes and Coins M1: Very easy to spend M0 + checking account deposits M2: Pretty easy to spend M1 + short term time deposits and so on … M25: Not easy to spend at all We will think of “Money” as M1 for this class

The Demand for Money Definition: the decision about the forms in which to hold one’s wealth is called a portfolio allocation decision. Anyone who has wealth must decide on a mix of assets as a way to hold wealth....