Lecture 17
MONEY

1. Barter

• Exchange of goods
• Problems:
  • Double coincidence of wants may not occur
  • Arriving at the terms of exchange is problematic

2. Functions of money

1. Medium of exchange:
   Exchange goods for money

2. Unit of account:
   Standard unit for quoting prices

3. Store of value:
   Can be stored over time to be used later

3. Fiat money

• Decreed as money by the govt (issuer)
• No intrinsic value
• People use money to buy goods of intrinsic value

4. Liquidity

• Ease with which an asset can be converted into cash

5. Measuring the stock of money

• Based on liquidity

5.1 Narrow definition of money supply (M1)

• Completely "liquid"

• M1 = Currency in circulation + Checking deposits (in banks, credit unions) + Travelers' checks

5.2 Broader definition of money supply (M2 and M3)

• Less "liquid"

• M2 = M1 + Money market accounts (in banks, mutual funds) + Savings deposits + Small-denomination CD's (< $100,000)

• M3 = M2 + Large-denomination CD's