MoneyBanking.doc - CHAPTER TWELVE MONEY AND BANKING I...

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CHAPTER TWELVE MONEY AND BANKING I. Functions of Money A. Medium of exchange : Money can be used for buying and selling goods and services. B. Unit of account : Prices are quoted in dollars and cents, and allow us to make comparisons among possible choices. Money can be used as a means of measurement C. Store of value : Money allows us to hold purchasing power acquired in the present for use in the future. It is a convenient way to store wealth. II. Components of the Money Supply A. Narrow definition of money: M1 includes currency and checkable deposits 1. Currency (coins + paper money) held by public. a. Is “token” money, which means its intrinsic value is less than actual value. The metal in a dime is worth less than 10¢. b. All paper currency consists of Federal Reserve Notes issued by the Federal Reserve. 2. Checkable deposits are included in M1, since they can be spent almost as readily as currency and can easily be changed into currency. a. Commercial banks are a main source of checkable deposits for households and businesses. b. Thrift institutions (savings & loans, credit unions, mutual savings banks) also have checkable deposits. 3. Qualification: Currency and checkable deposits held by the federal government, Federal Reserve, or other financial institutions are not included in M1. B. Money Definition: M2 = M1 + some near-monies which include: Savings deposits and money market deposit accounts. 1. Small time deposits (certificates of deposit) less than $100,000. 2. Money market mutual fund balances, which can be redeemed by phone calls, checks, or through the Internet. C. Money Definition: MZM = M2 – small time deposits + money market mutual fund balances owned by businesses. MZM stands for “money zero maturity” and measures monetary balances that are immediately available, at no cost, for household and business transactions. D. Which definitions are used? M1 is simplest and often cited, but M2 and MZM are often used by economists. The text will ignore the distinctions and focus on the more general concept of the money supply, keeping in mind that changes in M1 components will also change M2 and MZM.
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