CHAPTERS 7 AND 8
• Money is defined as any commodity or token that is generally acceptable as a means of payment
o • Commodity money
o • Fiat money: value not connected to its non-monetary use
Why do people accept fiat money? Expectation of acceptance by others
• • Money serves the following functions:
o • Medium of exchange (means of payment)
▪ ▪ A medium of exchange is any object that is generally accepted in
exchange for goods and services.
▪ ▪ Barter: an exchange in which goods and services are exchanged directly
for other goods and services (without a medium of exchange)
▪ ▪ Barter requires a double coincidence of wants
▪ ▪ A double coincidence of wants is the situation where the supplier of
good A wants
good B and the supplier of good B wants good A
o • Store of value
o • Unit of account
o • Political tool
• • Today, money consists of:
o • Currency: notes and coins held by individuals and businesses
o • Deposits at banks and other depository institutions
• • Official measures of money: 2 official measures
o • M1: consists of currency and travelers’ checks plus checking deposits owned by
individuals and businesses. M1 does not include currency held by banks, and it does
not include currency and checking deposits owned by the US government.
o • M2: consists of M1 plus time deposits, savings deposits, and money market
mutual funds and other deposits.
• • Liquidity: the property of being easily convertible into a means of payment
• • Deposits are money but checks are not. (Checks only instruct a bank to transfer money
from one’s account
• • Credit cards are not money.
2. Depository institutions
• • Depository institutions are companies or other institutions that take deposits and use the
funds to buy assets for profit, e.g. banks.
• • Liabilities (“sources of funds”): things you have to pay at some point, including:
o Checking deposits
o Other deposits (savings etc.) o “Borrowings”