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Lecture 2: Measuring Money

Lecture 2: Measuring Money. The functions of money. The functions money serves: medium of exchange. unit of account. store of value. std. of deferred value. To be money, the object must serve as a final means of payment and redeemable on demand at face value.

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Lecture 2: Measuring Money

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  1. Lecture 2:Measuring Money Money and Banking - Dr. D. Foster

  2. The functions of money • The functions money serves: • medium of exchange. • unit of account. • store of value. • std. of deferred value. To be money, the object must serve as a final means of payment and redeemable on demand at face value. • Think of an example of some money that doesn’t serve all these functions (or, at least, not well). Money and Banking - Dr. D. Foster

  3. Brief History • Evolution of money: • A “useful” commodity. • A money substitute (aka representative money). • A fiat money. • What will it take for Bitcoin to become money? • Bank “notes” as money substitutes. • U.S. fiat money – Civil War “greenbacks.” • Gold standard: 1879 to 1933/1971. • Federal Reserve in 1913. Money and Banking - Dr. D. Foster

  4. Measurement • Measured based on liquidity of financial assets. • M1 = [Coins and] currency in circulation (C) + “transactions deposits” (D) + TC • M2 = M1 + SDS +TDS + MMMFIndividual • M3 = M2 + TDL + MMMFInstitutional + Euro$ + RP Liquidity – how fast, at full market value, an asset can be converted into a means of payment. • Review FRS “Regulation D” on components of the money supply. Money and Banking - Dr. D. Foster

  5. The Monetary Base • Monetary Base (MB) = C + bank reserves (R) • M1 & M2 are/were highly correlated with MB. • M1 relates to economy [M*V=P*Y]. • MB plays a role in the government’s budget:G = T + Bonds + MB • The Fed has perfect control over the MB but not M1. Why? • What does the correlation of MB to M1 imply for policy? • Review monetary data. Money and Banking - Dr. D. Foster

  6. Lecture 2:Measuring Money Money and Banking - Dr. D. Foster

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