In this chapter provides knowledge of money. The contents of this chapter include all of the following: What is money? Medium of exchange, unit of account, store of value, forms of money, how do we measure money? Determination of interest rates,. | MONEY What is Money? 3 Distinguishing Features of Money: .Medium Of exchange .Unit of Account .Store of Value Medium of Exchange Facilitates efficient economic transactions Advantage over Barter Economy: Double Coincidence of Wants Not Necessary Promotes Specialization & Division of Labor Unit of Account Measure of Value in the Economy Common Yardstick to Value Different Goods and Services Store of Value Enables agents to shift consumption across time, ., save now, consume later. Other financial & Non-financial assets may also have this property. Money is distinguished by its Liquidity. Money is unattractive as a store of value in an inflationary environment. Forms of Money Commodity Money: Money that is inherently valuable, ., Gold & Silver Paper Money: Initially paper money used to be convertible into an equivalent amount in precious metals. More recently, no such convertibility : fiat money. Checkable Deposits: Convenient, Safe & Useful for Large Transactions Electronic . | MONEY What is Money? 3 Distinguishing Features of Money: .Medium Of exchange .Unit of Account .Store of Value Medium of Exchange Facilitates efficient economic transactions Advantage over Barter Economy: Double Coincidence of Wants Not Necessary Promotes Specialization & Division of Labor Unit of Account Measure of Value in the Economy Common Yardstick to Value Different Goods and Services Store of Value Enables agents to shift consumption across time, ., save now, consume later. Other financial & Non-financial assets may also have this property. Money is distinguished by its Liquidity. Money is unattractive as a store of value in an inflationary environment. Forms of Money Commodity Money: Money that is inherently valuable, ., Gold & Silver Paper Money: Initially paper money used to be convertible into an equivalent amount in precious metals. More recently, no such convertibility : fiat money. Checkable Deposits: Convenient, Safe & Useful for Large Transactions Electronic Money: Debit Cards, Wire Transfers (FedWire, Clearing House Interbank Payments System) Efficient Concerns about Safety & Security How Do We Measure Money? Different Measures of Money Depending Upon What is Included and What is Not. Usual Criterion for Qualifying as Money: Acceptability as Medium of Exchange M1 Also known as ‘Narrow Money’ Includes Currency Travelers Checks Demand Deposits Other Checkable Deposits M2 Also known as ‘Broad Money’ Includes M1 Small Denomination Time Deposits Savings & Money Market Deposits Non-Institutional Shares in Money Market Mutual Funds Overnight Repos Overnight Eurodollar Deposits M3 Includes M2 Large Denomination Time Deposits Institutional Shares in Money Market Mutual Funds Term Repos Term Eurodollar Deposits L Includes M3 Short Term Treasury Securities Commercial Paper Savings Bonds Banker’s Acceptances DETERMINATION OF INTEREST RATES How are Interest Rates determined by the Market ? 2 Analytical Frameworks: Loanable Funds Framework Liquidity .
