ECON 204 1st Edition Lecture 14Outline of Last Lecture XIX. Exam 2 Practice ProblemsA. Consumption functionB. AD/ASC. Shock typeOutline of Current LectureXX. About MoneyA. Roles of moneyB. Types of moneyC. Measuring money supplyCurrent LectureXX. About MoneyYou cannot understand monetary policy without understanding money.Money: anything that is accepted as payment for goods and services or the repayment of debtsCommodity: a marketable item produced to satisfy wants or needs. Economic commodities comprise goods and services. Money is a special commodity. A. Roles of money1. Medium of exchange: reduces transaction costs and promotes specialization (do not have to find someone with exactly what you want willing to trade for something specific that you own)2. Store of value: with money you can hold purchasing power over time. Note: liquidity: the relative ease and speed with which an asset can be converted into a medium of exchange. How well money performs this function depends on prices. Money is the most liquid asset. 3. Unit of account: measures the value of commodities in an economy. This assumes prices=value. Remember people value things differently and there are many other types of value. DualismCommodities have both an intrinsic (use) value and an exchange value.These notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.Ex: a chair. You can sit on the chair (intrinsic value) or trade it for something else (exchange value)Money is a weird commodity because it has a lot of exchange value but little to no intrinsic value. When we use credit cards or some sort of virtual way to transfer money it has no intrinsic value. Currency in circulation: cash held by the public (usually denoted C)Checkable bank deposits: money in the bank that can be distributed using checksMoney supply: total value of financial assets in the economy that are considered moneyB. Types of money1. Commodity money: used as a medium of exchange2. Commodity-backed money: no intrinsic value, the value is guaranteed by a promise it will hold value (ex: gold standard)3. Fiat money: medium of exchange whose value derives entirely from its official status as a means of payment (ex: dollar bills)C. Measuring money supplyThe Fed calculates 2 monetary aggregates1. M1: only money in circulation (incredibly volatile)2. M2: contains M1 and near moneys (includes savings so not as volatile as M1)Near moneys: financial assets that are not directly usable as a medium of exchange but can be easily exchangedM3 includes M1 and M2 as well as the next level of less liquid commoditiesEach “M” contains factors that are less liquid than in the previous “M”Ex: M2 contains savings, M1 only contains money in circulation (the most