What is the common link?• Amber, bread, cows, drums, eggs,

feathers, gongs, hoes, ivory, jade, kettles, leather, mats, nails, oxen, pigs, quartz, rice, salt, tobacco, umiacs, vodka, whale’s teeth, yarns, and zappozats (decorated axes).

Answer

• They all have been forms of money in different societies at one time or another

• Questions:

1. How can such different things be money?

2. Why do we need money?

How can such different things be considered money?

• Money is anything that is readily exchanged as a source of value.

• ‘Money is as money does’ meaning, anything that performs the functions of money can be money

• Why can’t anything then be money?-

Ans: For something to be money, it must possess certain attributes.

Functions/Attributes of Money

• Medium of exchange

• Unit of account

• Store of value

• Standard of deferred payment

Historical Origins of Money

• The clumsiness of barter provided an economic impulse but that was not the primary factor.

• The use of money evolved out of deeply rooted custom (pay, pacere, pacify). Wehrgeld =Blood Money, Bride Money

Medium of Exchange

• Money is something that is generally accepted as payment for goods and services

Why do we need money?

• Money is an odd commodity- Its fundamental use is in its ability to facilitate exchange. It allows people to specialize.

Criteria for Medium of Exchange

• Acceptable to most traders

• Standardized quality

• Durable

• Valuable relative to its weight

• Divisible

Unit of Account

• Gives one standard by which all goods and services in the economy are measured: for example, in the U.S all goods and services are measured in dollars

* some economies still have multiple currencies

Store of Value

• Money allows value to be stored easily.

• Its not the only way to store value, but it allows you easy liquidity (easy to take out and use to exchange for goods and services).

• * but what about inflation?

Standard of Deferred Payment

• Money provides a standard by which people will accept payment at a later date?

*but what about inflation?

Inflation makes money lose

some of its functions (store of value and standard of deferred payment)

Germany:Feb 1923- first million mark noteNov 1923-first billion mark note

Hungary's inflation rate for July 1946 was 41,900,000,000,000,000 percent

Collecting World Paper Money by Lance K. Campbell.

Types of money

• Commodity money

• Fiat money (money that is decreed to be money by an issuing authority)

• Checks

Counterfeiting!

• Operation Bernhard

• SuperDollars

• Euro Forgery

Measuring Money Supply

• M1= currency+ demand deposits+other checking deposits

• M2=M1+small time deposits, savings deposits, money market deposits, others

• M3=M2+large time deposits, institutional money market fund balances, repurchase agreements

Arranged by level of liquidity: M1 most liquid, M3 is least.

Figure 2.2 Measuring Monetary Aggregates

M1 M2 and M3

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1987

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1989

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1991

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2001

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2003

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2005

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$ B

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M1

M2

M3

Demand for Money (M1)

• TRANSACTIONS DEMAND - this is money used for the purchase of goods and services. The transactions demand for money is positively related to real incomes and inflation. As an individual's income rises or as prices in the shops increase, he will have to hold more cash to carry out his everyday transactions. The quantity of nominal money demand is therefore proportional to the price level in the economy. 

• PRECAUTIONARY BALANCES - this is money held to cover unexpected items of expenditure. As with the transactions demand for money, it is positively correlated with real incomes and inflation.

• SPECULATIVE BALANCES - this is money not held for transaction purposes but in place of other financial assets, usually because they are expected to fall in price.