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CHAPTER 7ASSETS MARKET, MONEY AND PRICE1. WHAT IS MONEY?
Anything that is generally acceptable as the means of  payment.
1.1 FUNCTION OF MONEY
Medium of exchange
Unit of account
Store of value
Medium of Exchange
Barter is inefficient – it requires a doublecoincidence of wants.
Money allows people to trade labor for money, andthen use money to buy goods and services.
Money allows people to trade with less cost in timeand effort.
Money allows specialization because trading ismuch easier.
Chapter 7: Assets Market, Money And Price
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Unit of Account
Money is the basic unit for measuring economicvalue.
This simplifies comparison of prices, wages andincome.
The unit-of-account function is closely linked withthe medium-of-exchange function.
Countries with very high inflation may use adifferent unit of account, so they don’t have toconstantly change prices.
Store of value
Money can be used to hold wealth
Most people use money as a store of value for ashort period and for small amounts, because it earnsless interest than money in the bank.
Money usefulness as a store of value declines withvery high inflation rate (hyperinflation). People tryto avoid the use of money by purchasing goods before the price increase. They tend to use other currencies rather than their own – currencysubstitution.
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2.MEASURING MONEY
There is no single best measure of money.
M1 monetary aggregate
o
Currency and traveler’s check held by public.
o
Demand deposits (which pay no interest).
o
Other checkable deposits (which may payinterest)
o
 Narrow money.
M2 monetary aggregate
o
M2 = M1 + less money like assets
o
Savings deposit
o
Time deposit bear interest and have a fixedterm.
o
Money Market Mutual Fund (MMMF)
o
MMDA
M3 monetary aggregate
o
M2 + less money like assets
o
Large denomination
o
MMMFs held by institution
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