This preview shows pages 1–3. Sign up to view the full content.
This preview has intentionally blurred sections. Sign up to view the full version.View Full Document
Unformatted text preview: Money and The Monetary System I. Money: what people regularly use to buy goods and services. • Took the place of barter: the exchange of one g/s for another Note: assets ≠ money A. Roles of Money 1. medium of exchange – a standard object used in exchange 2. unit of account – a standard for quoting prices 3. store of value – stores wealth from one period to another 4. standard of deferred payment – allows for intertemporal contracts B. Types of Money 1. Commodity money – has value other than as medium of exchange. 2. Fiat money – declared money by the government; has no intrinsic value (works on faith in the government) C. Money Measurements M1: paper and coins (in circulation – not on reserve in banks), checking accounts and traveler’s checks. M2: M1 + savings accounts, small time deposits (CDs) and money market mutual funds shares owned by individuals. M3: M2 + large time deposits, institutional money market accounts, and certain Euro deposits. L (long-term liquid assets): M3 + non-bank investments in U.S. Savings bonds, short-term Treasury securities, commercial paper, and bankers' acceptances. Liquidity: the ease with which something can be converted to cash M1 is the most liquid. II. Banking System A. Fractional Reserve Banking 1. Money can be “created” [money supply (MS) will depend on reserve ratio] 2. Banks are allowed to make profits by lending more money than they actually...
View Full Document
This note was uploaded on 04/29/2008 for the course ECON 2020 taught by Professor Kaplan,jul during the Spring '08 term at Colorado.
- Spring '08