goods and services are produced in an economy: 3. Monetary Payment System: People trade goods and services in return for money. As previously discussed, the use of money dramatically cuts down on the transactions costs arising from barter, so it is not surprising that barter payment systems have tended to evolve into monetary payment systems. II. Evolution of Money 1a. Commodities(cattle, shells, butter, rats…), 1b.Precious metals (gold and silver) 2. Paper currency (=>Fiat Money)3. Deposits (Checks) 4. Electronic means of payment: Fedwire, SWIFT, ACH5. Electronic money: Debit cards, Stored-value cards, Electronic cash III. How Do We Define and Measure Money? Anything that is generally accepted in payment for goods and services. 1. Theoretical Approach Use economic theory to decide assets to include (See Table 1) Different Monetary Aggregates: M1,M2, M3 … M1= Currency (in circulation) + (Current) Deposits M2 = M1 + …. M3 = M2 + …. Size of these aggregates depends on Monetary Base:MB = Currency (in circulation) + (Bank’s) Reserves 2. Empirical Approach Decide which measure of money works best in prediction: Money equals a weighted aggregates depending on degree of “moneyness,” some fraction of asset included in money E.g.: money = M1 + .60*(money market funds) + + .40*(savings depositsNOTES D Stone Money on Yap Island,Micronesia
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