What is Money?

  • There are two types of Money (M1), or assets that can be easily used to purchase goods and services.

    • Currency in circulation is all the money held by the population

    • Checkable bank deposits are all the funds held in bank accounts in which individuals can write checks off of

    • Traveler's checks

  • Another type of money that is "almost" checkable would be money in saving accounts, CDs or money market accounts

  • Without money, we would barter and there would have to be a "double coincidence of wants" in order for exchange to take place

  • M1

    • Cash

    • Money in checking accounts

    • Traveler's checks

  • M2

    • All money in M1 plus "near-moneys"

    • Saving accounts

    • Certificate of Deposits

    • Money Market Funds


    MO Money as a Means of Exchange "Currency in Circulation' The
narrowest definition of money, limited to banknotes and coins in
public circulation 'Monetary Base" or "Total Currency" All physical
banknotes and coins held by both the public and by the banks as cash
reserves (also known as "Vault Cash") 'Money' Defined as MO + Demand
Deposits (also known as "Sight Deposits" or Chequing Accounts") 'Money
and Close Substitutes" Defined as Ml + Small Savings and Time Deposits
(also known as "Term Deposits") 'Money Zero Maturity" A recent
monetary aggregate meant to measure all liquid forms of money within
an economy. MZM represents all money in M2 less Time Deposits, plus
all Money Market Funds 'Broad Money" Defined as M2 + Large Time
Deposits, Institutional Money Market Funds, Short-Term Repurchase
Agreements, along with other large liquid assets Money sore of YaJue

Roles of Money

  • Medium of Exchange

    • Money is used as a medium of exchange rather than consumption

    • Germany, in 1923, used eggs and lumps of coal as its medium of exchange during hyperinflation

  • Store of Value

    • Means of holding purchasing power over time

    • Burgers, while delicious, would make terrible money because it's not a good store of value

  • Unit of Account

    • Measure used to set prices and make economic calculations

    • Easier to measure value with money than through barter

Types of Money


  • Commodity Money

    • Good that is used as a medium of exchange that has intrinsic value, like silver, gold or cigarettes
  • Commodity-Backed money

    • Paper money that has no intrinsic value but is backed by a commodity, usually gold or silver
  • Fiat Money

    • Money that's used which has no intrinsic value

    • Governments have the power to create money out of thin air and cause inflation

    • e.g. Federal Reserve notes

    • In 2009, Zimbabwe abandoned the Zimbabwean dollor - foreign currencies are used

    • Inflation in 2007 - 66,212.3%

    • Inflation in 2008 - 231,150,888.87% (1 month)

Preset vs. Future Value

  • Future Value is the amount a lump-sum of money is worth after a specified time in the future

  • Formula


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