pcecon.com Class Notes
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There is a special item that
1. is used as a medium of exchange, making trade easier
You don't have to look for the rare person to trade with that has exactly the good that you want and also is willing to obtain exactly the good you have. Instead, you only need to find one person who will pay you the medium of exchange for the good you have to sell, then find another person who will take the medium of exchange in trade for what you want. Even though this involves two trades with two people, these two people will probably be easier to find.
2. is a store of value
If you have extra goods to sell, you can sell them for this special item, and store it instead of storing the goods, which may be perishable or hard to store.
3. is a very liquid asset
This item is easier to use in trades than just about anything else, and its value in those trades is pretty easy to predict.
4. is a unit of account
Because we have this special item, every good only needs one price- its price in terms of this item. Without this item to serve as the unit of account, every good would need to have a different price for each of the other goods and services that someone might want to buy it with (requiring thousands of different prices for each good).
5. is used to schedule payments over time
Because this item tends to keep value pretty well over time, people can arrange to pay for things they buy now with future installments of this item.

This amazing item is called money.

These five things that money does for people are sometimes called the "functions" of money.

How to recognize if something is being used as money:
Money is anything that is commonly used and generally accepted as final payment for a debt. Keep in mind that money is something used as final payment; if you simply owe someone different after a payment (as would be the case with a credit card, for example) then you still haven't paid with money.

Features that would be good for money: durable, divisible, transportable, easy to identify, stable value. Lots of things used as money in the past have proved to lack one or two of these, which is why they are no longer used.

So, what kinds of things are or have been used as money?

Commodity money is something that has some use or value in addition to its role as money. Examples of some past or present commodity monies are tobacco, tea, cows, goats, sheep, animal pelts, fish-hooks, gold, and silver.
Fiat money is money that is not valuable in itself, and is not backed up by anything of value. Usually, fiat money is controlled by, or at least endorsed by, some governmental authority.

All modern "sophisticated" societies have moved away from using commodity money, since the value of commodity money changes with supply and demand for the item as good. A large crop, production, or harvest of a commodity money, for example, can make the money virtually worthless.

Fiat money also has the problem of losing its value sometimes in some countries. At these times, commodity money often starts being used instead.


Name two assets that we in the U.S. use as money (items that count in M1 or M2).


Most money in the U.S is either...
bank account deposits (savings accounts and checking accounts)
currency (paper money and coins)

M1=currency+checkable deposits in bank accounts (this includes debit-card accessed accounts as well) ($1.2 trillion as of 2002)

M2=saving account deposits in banks + M1 ($5.5 trillion in 2002)

Most of the M2 measure of money is bank accounts. M1 is about half currency. Remember, bank account money is money in the U.S. (and in most modern countries).

For our purposes, we use the term "bank" to refer to any banking institution, whether it is a commercial bank (business oriented), savings bank (consumer oriented), savings and loan, or credit union.

Checking account deposits (also called "checkable deposits") would include such things as travellers' checks and cashier's checks, as well as old fashioned checking accounts (also called "demand deposits").
Savings accounts include most other bank, saving and loan or credit union accounts that you have to access by going to the place where the money is deposited, making a phone call, or filling out paperwork. Many of these kinds of accounts are called "time deposits," to reflect that it takes a bit of time to get the money out.