ECON 2105 1nd Edition Lecture 17 Outline of Last Lecture I. Stabilization Policy Outline of Current Lecture I. Money Functions II. Types of Money III. Measuring the Money Supply IV. Role of the Fed Current LectureModule 23--- password for quiz 2015- Why we study MONEY - Interest rate might be affected by the level of money in the economy- Inflation rate might be affected by the level of money in the economy- The level of money supply might be important for monetary policy makers.- Money plays unique and very important roles in modern economies. - What is money?- First of all, it is an asset. - What makes an asset to be called as money?I. Money Functions - Money must function as: o a medium of exchange. o a store of value.o a unit of account.- Medium of exchange: Something people accept as payment for goods and serviceso Money is a medium of trade between sellers and buyerso Money avoids “double coincidence of wants” that bartering requiresThese 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.- It is an asset that individuals acquire for the purpose of trading rather than for their own consumption.- Store of value: Money is a means of holding purchasing power over time.- It enables people to save the money they earn today and use it to buy thegoods and services they want tomorrow.- Unit of account: Money provides a yardstick for measuring and comparing the values of a wide variety of goods and services.- A $2 item is twice as valuable as a $1 item.- Is it money or not? Medium of exchange, unit of accounts, store of value, must satisfy all 3 o Credit cards?  medium of exchange, unit of accounts  not money o Debit cards medium of exchange, store of value, unit of account yes it is money!!!!!o Wallmart Gift card  not money  bc not medium of exchange o Prepaid Visa card  YES MONEY! o Money order  nooo… not medium of exchange o Mexican peso in USA nope! o Dollar in Mexico  they accept dollars II. Types of Money - For thousands of years, societies have used commodity money.- Commodity money: a good used as a medium of exchange that has intrinsic value in other uses.- To make life simpler (and safer), societies began using commodity-backed money.- Commodity-backed money: a medium of exchange with no intrinsic valuewhose ultimate value is guaranteed by a promise that it can be converted into valuable goods.- Most modern economies use fiat money.- Fiat money: money whose value derives entirely from its official status as a means of payment.III. Measuring the Money supply - Currency in circulation: cash held by the public. (C)- Checkable bank deposits: bank accounts on which people can write checks. (D)- Monetary aggregate: an overall measure of the money supply. MB=C+Bank reserves o The monetary base (MB): currency outstanding and total reserves at the Fed.o M1: currency outstanding and checkable deposits. M1=C+D+travelers checks o M2: M1 plus saving deposits, money market mutual funds, and small-time deposits. M2=M1+time deposit …….. (M2 is less liquid) ----- M1 includes only the most liquid forms of money.- M2 includes near-moneys: financial assets that can’t be directly used as a medium of exchange but can readily be converted into cash or checkable bank deposits.IV. Role of the Fed- The Fed has direct control only over the monetary base.- The Fed can indirectly affect M1 and M2 by controlling the monetary base.- M1 and M2 and can change independent of what the Fed does.