09 Money and Inflation - Agenda 1. What is Money? Money and...

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1 9-1 Money and Inflation (excepting the Quantity Theory) 9-2 Agenda 1. What is Money? 2. The Federal Reserve System 3. The Cost of Inflation 9-3 What is Money? Money is a financial asset that serves three functions: 1. The unit of account. 2. A store of value. 3. The medium of exchange. 9-4 What is Money? The three functions of money: 1. The unit of account : money is how value in the economy is measured. Indicates the price of all goods and services in the economy.
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2 9-5 What is Money? The three functions of money: 2. A store of value : money is a means of preserving purchasing power. Other assets can also serve as a store of value but not as the medium of exchange. Thus, money is the most liquid of all asset. 9-6 What is Money? The three functions of money: 3. The medium of exchange : money is the financial assets that can be used to finalize transactions. Generally accepted in payment for goods and services. Generally accepted in the repayment of debts. 9-7 What is Money? In the U.S., there are two measures of those financial assets that serve as money, called monetary aggregates. 1. The M1 money supply. 2. The M2 money supply. 9-8 What is Money? M1 (in 2009) consists of: 1. Currency $851.4 bn 2. Travelers’ checks $ 5.2 bn 3. Demand deposits $427.9 bn 4. Other checkable deposits $350.3 bn = Total M1 $1,634.8 bn
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3 9-9 What is Money? Money Stock: M1 SA, Bil.$ 10 05 00 95 90 85 80 75 70 65 60 Source: Federal Reserve Board /Haver Analytics 2000 1600 1200 800 400 0 2000 1600 1200 800 400 0 9-10 What is Money? M2 (in 2009) consists of: 1. M1 $1,634.8 bn 2. Small time deposit $1,333.1 bn 3. Savings deposits $4,510.0 bn 4. Retail MMMF’s $ 956.9 bn = Total M2 $8,434.8 bn 9-11 What is Money? Money Stock: M2
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09 Money and Inflation - Agenda 1. What is Money? Money and...

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