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Chapter 13Money and BankingMoney and Banking

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What is money?What is money?

Money is what money does Anything that performs the functions of

money is money What are the functions of money?

1. Medium of exchange

2. Unit of account

3. Store of value

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1. Medium of exchange1. Medium of exchange

Used to buy goods and services Accepted in payments Barter system Convenient way of exchange: specialization

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2. Unit of account2. Unit of account

Monetary units (KD) to measure the relative worth of goods and services

The price of each good and services is stated in monetary terms

Enable buyers to compare between a verity of goods and services

Debt, GDP, taxes

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3. Store of value3. Store of value

Transfer purchasing power from the present to the future

Savings Best store of value in short terms Efficient liquid asset Liquidity: transformation of an asset into

goods and services Inflation?

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Supply of Money: Measuring Money in the Economy M1 = Currency + Checkable deposits Currency: Coins + paper money M2= M1 + Saving deposits + Small time

deposits + Money market mutual funds M3 = M2 + large time deposits

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Value of MoneyValue of Money

1. Acceptability

2. Legal Tender

3. Relative scarcity

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Money and PricesMoney and Prices

What is the relationship between money (quantity of money M1, M2, M3…) and the price level in the economy?