Assessing UK Money Supply Measures in Light of the Credit Crunch
What Is Money?ccftp.scu.edu.cn/Download/20180914000519720.pdf · describes the three different...
Transcript of What Is Money?ccftp.scu.edu.cn/Download/20180914000519720.pdf · describes the three different...
Chapter 3
What Is Money?
Meaning of Money
What is it?
Money (or the “money supply”): anything that
is generally accepted in payment for goods
or services or in the repayment of debts.
A rather broad definition
Meaning of Money
Money (a stock concept) is different from:
Wealth: the total collection of pieces of
property that serve to store value
Income: flow of earnings per unit of time
(a flow concept)
4-4
Methods of Exchange
Functions of Money
Medium of Exchange:
Eliminates the trouble of finding a double coincidence of needs (reduces transaction costs)
Promotes specialization
A medium of exchange must
be easily standardized
be widely accepted
be divisible
be easy to carry
not deteriorate quickly
Functions of Money
Unit of Account:
used to measure value in the economy
reduces transaction costs
Store of Value:
used to save purchasing power over time.
other assets also serve this function
Money is the most liquid of all assets but loses
value during inflation
Evolution of the Payments System
Commodity Money: valuable, easily
standardized and divisible commodities (e.g.
precious metals, cigarettes).
Fiat Money: paper money decreed by
governments as legal tender.
Evolution of the Payments
System
Checks: an instruction to your bank to transfer
money from your account
Electronic Payment (e.g. online bill pay).
E-Money (electronic money):
Debit card
Stored-value card (smart card)
E-cash
Rush to Anwer
Of money’s three functions, the one that
distinguishes money from other assets is its function
as a ( )
A. store of value.
B. unit of account.
C. standard of deferred payment.
D. medium of exchange.
E. All of the above
Rush to Answer
in a barter economy, if there are four goods in a
barter economy, then one needs to know _____
prices in order to exchange one good for another.
( )
A. 4
B. 5
C. 6
D. 8
Rush to Answer
As the payments system evolves from barter to a
monetary system, ( )
A. commodity money is likely to precede the use of
paper currency.
B. transaction costs decline.
C. the number of prices that need to be calculated
increase rather dramatically.
D. all of the above.
E. only (a) and (b) of the above.
Measuring Money
How do we measure money? Which
particular assets can be called “money”?
Construct monetary aggregates using the
concept of liquidity:
M1 (most liquid assets) = currency +
traveler’s checks + demand deposits + other
checkable deposits.
Measuring Money
M2 (adds to M1 other assets that are not so
liquid) = M1 + small denomination time
deposits + savings deposits and money
market deposit accounts + money market
mutual fund shares.
Table 1 Measures of the
Monetary Aggregates
Monetary Aggregates
Currency
Traveler’s Checks
Demand Deposits
Other Check. Dep
M1 M2
M3
Small Den. Dep.
Savings and MM
Money Market Mutual Funds Shares
M1 vs. M2
Does it matter which measure of money is
considered?
M1 and M2 can move in different directions
in the short run (see figure).
Conclusion: the choice of monetary
aggregate is important for policymakers.
FIGURE 1 Growth Rates of the M1
and M2 Aggregates, 1960–2008
Sources: Federal Reserve Bulletin, p. A4, Table 1.10, various issues; Citibase databank;
www.federalreserve.gov/releases/h6/hist/h6hist1.txt.
How Reliable are the Money Data?
Revisions are issued because:
Small depository institutions report infrequently
Adjustments must be made for seasonal
variation
We probably should not pay much attention
to short-run movements in the money supply
numbers, but should be concerned only with
longer-run movements
Table 2 Growth Rate of M2: Initial and Revised Series,
2008 (percent, compounded annual rate)
Rush to Answer
There is no single precise measure of money or
the money supply for economists because ( )
A. the government considers money supply statistics
to be confidential and refuses to publish them.
B. deciding what is generally accepted in payment for
goods and services or in the repayment of debt is
difficult to determine.
C. economists cannot agree if currency should be
considered money.
D. of each of the above.
E. of both (a) and (b) of the above.
Rush to Answer
Which of the following is not included in the
measure of M1? ( )
A. NOW accounts
B. Demand deposits
C. Currency
D. Repurchase agreements
E. None of the above
Which of the following is included in the M1
measure of money but is not included in the M2
measure of money? ( )
A. Currency
B. Checkable deposits
C. Traveler’s checks
D. All of the above
E. None of the above
Which of the following is not included in the M1
measure of money but is included in the M2 measure
of money? ( )
A. Currency
B. Traveler’s checks
C. Demand deposits
D. Small denomination time deposits
If an individual moves money from currency to a
money market deposit account, ( )
A. M1 decreases and M2 stays the same.
B. M1 stays the same and M2 increases.
C. M1 stays the same and M2 stays the same.
D. M1 increases and M2 decreases.
Which of the following statements accurately
describes the three different measures of the money
supply—M1, M2, and M3? ( )
A. The three measures do not move together, so they
cannot be used interchangeably by policymakers.
B. The three measures’ movements closely parallel each
other, even on a month-to-month basis.
C. Short-run movements in the money supply are
extremely reliable.
D. Both (a) and (c) of the above.