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Unformatted text preview: Chapter 2 Money and the Payments System Chapter Overview As indicated by the title, this chapter covers money and the payments system, which includes checks and electronic payments. The implications of new technologies for money are discussed as well as the measurement of the money supply. After reading this chapter, students will be prepared to: • Define money and explain its three basic uses, which are: o Means of payment; o Unit of account; and o Store of value. • Explain how money makes the payments system work, and define the three broad categories of payments, which are: o Cash; o Checks; and o Electronic payments. • Evaluate the future use of money and the likelihood of its being used less and less as a means of payment • Comprehend the links among money, inflation, and economic growth, and the requisite need to measure the money supply. • Describe two basic measures of money, which are: o M1, the narrow definition of money, and o M2, a broader measure which includes assets not used as a means of payment. Important Points of the Chapter To understand the impact of money on the economy—why it’s so important to the smooth functioning of the economy and how it improves everyone’s well being—we need to understand exactly what money is, and to quantify its impact on the economy we need to be able to measure it. The goals of this chapter are to understand what money is, how we use it, and how we measure it. Application of Core Principles Principle #3: Information (page 14) Money as a means of payment solves an information problem; money finalizes payments so that buyers and sellers have no further claim on each other. So long as a buyer has money, there is nothing more the seller needs to know. 12 Instructor’s Manual t/a Cecchetti: Money, Banking, and Financial Markets Chapter 2 Money and the Payments System Principle #1: Time (page 16) Money as a store of value saves time; holding money means not having to convert other assets into spendable form every time we wish to make a purchase. Principle #1: Time (page 28) The introduction of new money market accounts in the 1980s made M2 accounts more liquid. M1 and M2 no longer moved together and analysts stopped looking at M1 and began to look at M2. Teaching Tips/Student Stumbling Blocks • Most of the material in this chapter is fairly straightforward, but students will be puzzled by the idea that credit cards are not money. The key, as pointed out in the text, is that a credit card represents access to someone else’s money. Another way to explain this is to note that when one uses a credit card the transaction is not over; a bill will come and will need to be paid. • Here’s an idea for an interesting class discussion: are impulse purchases more likely when a credit card is available than when someone only has cash? If you assigned a spending journal in conjunction with the coverage of Chapter 1, use it to illustrate differences in spending patterns....
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- Spring '11
- Financial Markets, Manual t/a Cecchetti