What is Money?
Econ 4039: Monetary Economics
Sungjun Huh
Konkuk University
Review
The Economy with Financial Markets
funding money to producers in/
directly will cause producers to
increase GDP
Financial
Intermediaries
𝐿𝑜𝑎𝑛 𝐷
𝑟 𝑟
𝐿 ,𝑆
Producers Households
𝑤, 𝑟
Readings
Chapter 3. What is Money?
▶ Definition of Money
▶ Functions of Money
▶ Payment System
▶ Ways to Measure Money
Meaning of Money
Money (or the “money supply”): anything that is generally accepted
as payment for goods or services or in the repayment of debts.
▶ e.g.) Currency: paper bills and coins
▶ Currency is too narrow to define money; consider checks and/or
checking account
Money (a stock concept) is different from:
▶ Wealth: the total collection of pieces of property that serve to store
value at a single point of time (a stock concept)
⋆ e.g.) ownership of common stock, land, and houses
▶ Income: flow of earnings over some period of time (a flow concept)
⋆ e.g.) wages and salaries from jobs
Income and Wealth
Consuelo earns $300 per week
Assets Liabilities
Cash $80 Student loan $3,000
Checking account $1,200 Credit Card balance $250
Shares of stock $1,000
Car (Market value) $3,500
Furniture (Market value) $500 Net worth $3,030
Total $6,280
Wealth (net worth) is the value of assets minus liabilities
▶ assets are anything of value that one owns
⋆ e.g.) cash, a checking account, stocks, bonds, home, real estate,
jewelry, cars
▶ liabilities are the debts one owes
⋆ e.g.) credit card balances, student loans, mortgages
Functions of Money
Medium of Exchange:
▶ Eliminates the trouble of finding a double coincidence of needs
(reduces transaction costs)
▶ Promotes specialization: consider a barter economy
A medium of exchange must:
▶ be easily standardized
▶ be widely accepted
▶ be divisible
▶ be easy to carry
▶ not deteriorate quickly
Functions of Money
Unit of Account:
▶ Used to measure value in the economy
▶ Reduces transaction costs
⋆ e.g.) The economy with only three goods: apples, my lecture, and
Avengers: Endgame
Store of Value:
▶ Used to save purchasing power over time
▶ Other assets also serve this function
▶ Money is the most liquid of all assets but loses value during inflation.
Functions of Money
Examples
Credit Card
▶ Satisfies a medium of exchange and a (negative) store of value
▶ not a unit of account
⋆ a computer does not cost 10 VISA cards
A Paul Gauguin painting
▶ a store of value only
Bitcoin
▶ functions as a medium of exchange
▶ a unit of account and a store of value???
▶ [Link]
Functions of Money
Examples
Credit Card
▶ Satisfies a medium of exchange and a (negative) store of value
▶ not a unit of account
⋆ a computer does not cost 10 VISA cards
A Paul Gauguin painting
▶ a store of value only
Bitcoin
▶ functions as a medium of exchange
▶ a unit of account and a store of value???
▶ [Link]
Functions of Money
Examples
All these are not Money
Credit Card
▶ Satisfies a medium of exchange and a (negative) store of value
▶ not a unit of account
⋆ a computer does not cost 10 VISA cards
A Paul Gauguin painting
▶ a store of value only
Bitcoin
▶ functions as a medium of exchange
▶ a unit of account and a store of value???
▶ [Link]
Evolution of the Payments System
Recall the definition of Money: anything that is generally accepted as
payment for goods or services or in the repayment of debts.
Commodity Money: valuable, easily standardized and divisible
commodities
▶ e.g.) gold, silver, cigarettes
▶ drawbacks: difficult to carry around and hard to divide
Fiat Money: paper money decreed by governments as legal tender
▶ e.g.) paper currency and coins
▶ drawbacks: easily stolen, difficult to track, and difficult to transport
Evolution of the Payments System
Checks:
▶ an instruction to your bank to transfer money from your account
▶ drawbacks: takes time, processing fee
Electronic Payment
▶ e.g.) online bill pay
▶ drawbacks: hacking risk
E-Money (electronic money):
▶ Money exists only in electronic form
▶ e.g.) Debit card, Apple Pay, Samsung Pay, PayPal
▶ drawbacks: expensive infrastructure (computer, card reader,
telecommunications networks)
Measuring Money Supply
How do we measure money? Which particular assets can be called
“money”?
Construct monetary aggregates using the concept of liquidity:
▶ M1 (most liquid assets) = currency + traveler’s checks + demand
deposits + other checkable deposits
▶ M2 (adds to M1 other assets that are not so liquid) = M1 + small
denomination time deposits + savings deposits and money market
deposit accounts + money market mutual fund shares
Measuring Money Supply
[Note] Liquidity
Investopedia defines Liquidity as the degree to which an asset or
security can be quickly bought or sold in the market without affecting
the asset’s price
People prefer liquidity:
▶ This explains why people want to hold Money
▶ e.g.) An extra $2,800: you can either put it in your deposit account or
purchase Google stock
⋆ Deposit account → you will have $2,800 in cash whenever you want to
use
⋆ Stock → you don’t know how much cash you will have (price could
soar or fall)
Measuring Money Supply
M1 vs M2
Does it matter which measure of money is considered?
M1 and M2 can move in different directions in the short run figure
Conclusion: the choice of monetary aggregate is important for
policymakers and economists
M1 vs M2
Does it matter which measure of money is considered?
M1 and M2 can move in different directions in the short run figure
Conclusion: the choice of monetary aggregate is important for
policymakers and economists
Growth Rates of the M1 and M2 Aggregates, 1960-2018
usually M1 and M2 both in/decrease but not always, see 1990-2000
Goback