KW_Macro_Ch_13_Sec_01_The_Meaning_of_Money

KW_Macro_Ch_13_Sec_01_The_Meaning_of_Money - chapter 13...

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>> Money, Banking, and the Federal Reserve System Section 1: The Meaning of Money chapter 13 In everyday conversation, people often use the word money to mean “wealth.” If you ask, “How much money does Bill Gates have?” the answer will be something like, “Oh, $40 billion or so, but who’s counting?” That is, the number will include the value of the stocks, bonds, real estate, and other assets he owns. But the economist’s definition of money doesn’t include all forms of wealth. The dollar bills in your wallet are money; other forms of wealth—such as cars, houses, and stock certificates—aren’t money. What, according to economists, distinguishes money from other forms of wealth? What Is Money? Money is defined in terms of what it does: money is any asset that can easily be used to purchase goods and services. In Chapter 9 we defined an asset as liquid if it can eas- ily be converted into cash. Money consists either of cash itself, which is liquid by def- inition, or of other assets that are highly liquid. Money is any asset that can easily be used to purchase goods and services.
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2 CHAPTER 13 SECTION 1: THE MEANING OF MONEY You can see the distinction between money and other assets by asking yourself how you pay for groceries. The person at the cash register will accept dollar bills in return for milk and frozen pizza—but not stock certificates or a collection of vintage baseball cards. If you want to convert stock certificates into groceries, you have to sell them— trade them for money—and then use the money to buy groceries. Of course, many stores allow you to write a check on your bank account in payment for goods (or to pay with a debit card that is linked to your bank account). Does that make your bank account money, even if you haven’t converted it into cash? Yes. Currency in circulation —actual cash in the hands of the public—is considered money. So are checkable bank deposits —bank accounts on which people can write checks. Are currency and checkable bank deposits the only assets that are considered money? It depends. As we’ll see later, there are several widely used definitions of the money supply, the total value of financial assets in the economy that are considered money. The narrowest definition is the most liquid because it contains only currency in circulation, traveler’s checks, and checkable bank deposits. Broader definitions include other assets that are “almost” checkable, such as savings account deposits that can be transferred into a checking account with a phone call. All definitions of the money supply, however, make a distinction between assets that can easily be used to purchase goods and services, and those that can’t. Money plays a crucial role in generating
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KW_Macro_Ch_13_Sec_01_The_Meaning_of_Money - chapter 13...

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