Money and Monetary Policy

Why use money?

What would happen if we didn't have money?
The Barter System: goods and services are traded directly store value
.  There is no money exchanged.

Money?
It is anything that is generally accepted in payment for goods and services.
NOT the same as wealth and income

Wealth is the total collection of assets that store value
Income is a flow of earnings per unit of time

Money can be used as

1. Medium of Exchange
1. Buy Goods and Services
2. Unit of account
1. measuring the value of goods and services 
3. Store of value 

3 types of money: 

• Representative money: money that represents something of value 
• Ex: IOU's 
• Commodity money: something that performs the function of money and has alternative uses 
• Ex: Salt, Gold, Silver, Cigarettes 
• Fiat money: money because the government says so
• Ex: coins, paper money

6 characteristics of money: 

1. Durability
2. Portability
3. Divisibility
4. Uniformity
5. Limited Supply 
6. Acceptability 

3 types of money supply 

1. Liquidity- ease with which an asset can be accessed and converted into cash (liquidized) 
1. M1 (high liquidity) - Coins, Currency, and Checkable deposits (aka check) ( personal and corporate checking accounts which are the largest component of M1). AKA demand deposits. 
2. M2 (Medium Liquidity) - M1 plus savings deposits (money market accounts), time deposits (CDs = certificates of deposit), and Mutual Funds below $100k. 
3. M3 (Low Liquidity) - M2 plus time deposits above $100k