ECO3041 - Ch 13 Money & Banks

ECO3041 - Ch 13 Money & Banks - Chapter 13 Notes...

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Chapter 13 Notes Chapter 13 Notes Prof. Dacal Department of Economics, FIU Rafael Dacal
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Chapter 13 Notes Chapter 13 Money and Banks I. The use of Money Barter is the direct exchange of one good for another, without the use of money The use of money greatly simplifies the market transactions and by default it reduces transaction cost. We may identify several essential characteristics of money Medium of exchange – acceptance of payment Stores value Standard of value – serves as a yardstick. II. The Money Supply Cash versus Money The concept of money includes more than the dollar bills and coins in our pockets. Checking accounts can and do perform the same market transactions as cash. Money is anything generally accepted as a medium of exchange. Transaction Accounts Transaction account is a bank account that permits direct payment to a third party. The balance in your transaction account substitutes for cash, and is, therefore, a form of money Basic Money Supply Money supply (M1) is currency held by the public, plus balances in transaction accounts. 2 | P a g e
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Cash is only part of the money supply; a large portion of “money” consist of balance in transactions accounts. This is the narrowest definition of money. “M1 includes funds that are readily accessible for spending. M1 consists of: 1. Currency outside the U.S. Treasury, Federal Reserve Banks, and the vaults of depository institutions; 2. Traveler's checks of nonbank issuers; 3. Demand deposits; and 4. Other checkable deposits (OCDs), which consist primarily of negotiable order of withdrawal (NOW) accounts at depository institutions and credit union share draft accounts.” 1 M1 is perhaps the closest counter part of the theoretical definition of money because all its components are actively used and widely accepted for making payments. Credit Cards are not part of any money supply. Credit cards are just that, a credit account. An account you are borrowing from, and there for is not a payment. Only when you pay your bill with cash or your checking account are you using money. Near Money M2 includes a broader set of financial assets held principally by households. M2 consists of: 1. M1; 2. Savings deposits (which include money market deposit accounts, or MMDAs); 3. Small-denomination time deposits (time deposits in amounts of less than $100,000); and 4. Balances in retail money market mutual funds (MMMFs). The concept of and asset belong in the money supply depends on the liquidity of the asset. Liquidity is “the degree to which an asset or security can be bought or sold in the market without affecting the asset's price.” 2 Some of these assets in M2 cannot be used as currency, but can easily be converted. 1
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This note was uploaded on 01/22/2012 for the course ECO 3041 taught by Professor Dacal during the Fall '11 term at FIU.

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ECO3041 - Ch 13 Money & Banks - Chapter 13 Notes...

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