Department of Economics
Saint Louis University
Professor: Rapach
Fall 2008
ECON 420
Money and Banking

Chapter Outline for “Chapter 3—What is Money?” Frederic S. Mishkin, The Economics of Money, Banking, and Financial Markets, Eighth Edition (New York: Addison-Wesley, 2006)

MEANING OF MONEY

currency: paper money and coins

wealth: total collection of pieces of property that serve to store value

income: flow of earnings per unit of time

FUNCTIONS OF MONEY

Medium of Exchange

medium of exchange: used to pay for goods and services

·        easily standardized (so that simple to ascertain value)

·        widely accepted

·        divisible

·        easy to carry

·        must not deteriorate quickly

Unit of Account

unit of account: used to measure value in the economy

Store of Value

store of value: repository of purchasing power over time

liquidity: relative ease and speed with which an asset can be converted into a medium of exchange

hyperinflation: inflation rate exceeds 50% per month

EVOLUTION OF THE PAYMENTS SYSTEM

Commodity Money

commodity money: money made up of precious metals or another valuable commodity

Fiat Money

fiat money: paper currency decreed by governments as legal tender (meaning that legally it must be accepted as payment for debts)

Checks

Electronic Payment

E-Money

electronic money (e-money): money that exists only in electronic form

smart card: contains a computer chip that allows it to be loaded with digital cash from the owner’s bank account whenever needed

e-cash: used on the Internet to purchase goods or services

MEASURING MONEY

The Federal Reserve’s Monetary Aggregates

monetary aggregates: M1, M2, M3

See Table 1

HOW RELIABLE ARE THE MONEY DATA?

See Table 2

We probably should not pay much attention to short-run movements in the money supply numbers, but should be concerned only with longer-run movements.

QUESTIONS AND PROBLEMS: 1, 3, 5, 7, 8, 10, 14