Representative curr: has sth back its value.

CHAPTER 3 WHAT IS MONEY?

Learning Objectives
3.1 Describe what money is
3.2 List and summarize the functions of money
3.3 Identify different types of payment systems
3.4 Compare and contrast the M1 and M2 money supplies.
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.
- A broad definition:
+ Currency, consisting of paper bills and coins, clearly fits this definition and is one
type of money.
+ The word money is frequently used synonymously with wealth. Wealth includes not
only money but also other assets such as bonds, common stock, art, land,
furniture, cars, and houses.
+ People also use the word money to describe what economists call income. ” Income
is a flow of earnings per unit of time. Money, by contrast, is a stock: It is a certain
amount at a given point in time.
FUNCTIONS OF MONEY:
• Medium of Exchange: (phương tiện trao đổi)
– Eliminates the trouble of finding a double coincidence of needs (reduces
transaction costs- The time spent trying to exchange goods or services.)
– Promotes specialization.
- Barter economy-> trade records-> coinage-> banknotes-> digital money
• A medium of exchange must:
– be easily standardized
– be widely accepted
– be divisible
– be easy to carry
– not deteriorate quickly. (kh bị giảm giá trị 1 cách nhanh chóng)
• Unit of Account: (đơn vị tính toán)
– Used to measure value in the economy
– Reduces transaction costs by reducing the number of prices that need to be
considered.
• Store of Value: (cất giữ giá trị)
– 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.
EVOLUTION OF THE PAYMENTS SYSTEM:
• Commodity Money: valuable, easily standardized, and divisible commodities
(e.g. precious metals, cigarettes)
- such a form of money is very heavy and is hard to transport from one place to
another.
• Fiat Money: paper money decreed by governments as legal tender but not
convertible into coins or precious metal. (there is some trust in the authorities)
 • Checks: an instruction to your bank to transfer money from your account.
• Electronic Payment (e.g. online bill pay)
• E-Money (electronic money):
– Debit card
– Stored-value card (smart card)
– E-cash
MEASURING MONEY:
• Construct monetary aggregates using the concept of liquidity:
- Narrow money= M0+M1.
– M1 (most liquid assets) = currency + traveler’s checks + demand deposits + other
checkable deposits (tiền trong lưu thông)
- Broad money= M2+M3+…
– 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

- M1, M2 dịch chuyển có sự khác biệt lớn theo thời gian.

- Ngta thường sử dụng M2 nhiều hơn M1 vì theo thgian thì M1- tiền trong lưu thông có
thể mất giá nếu cứ cất giữ, trong khi M2 có những khoảng tiền lưu trữ sinh lời trong
ngắn hạn-> đo lường tiền theo M2> M1.