Definition, Measurement, and Functions of Money

What makes money, money?

• Money is anything widely accepted in trade.
• A ten-dollar note, a coin, a bank balance — all do the job.
• But why do we accept them, and how do we count them?
• Money does three jobs, comes in layers, and takes two forms.

The three functions of money

• Medium of exchange 交换媒介: it is accepted in payment, so we avoid clumsy barter 以物易物.
• Store of value 价值储藏: it holds its worth over time, so you can save it.
• Unit of account 记账单位: it is the common measuring stick for prices.
• One ten-dollar note can do all three at once.

The functions of money; the AP exam tests the first three

Measuring the money supply

• The money supply 货币供给 is measured in layers by how liquid it is.
• M1 counts the most liquid money: cash and checking deposits.
• M2 counts M1 plus slightly less liquid savings, such as savings and small time deposits.

Two forms of money

• Commodity money 商品货币 has value in itself, like gold coins.
• Fiat money 法定货币 (today's paper notes) has value only because a government declares it legal money and people accept it.
• Fiat money works purely on trust and acceptance.

Write from an M1 of 1000

• People hold 200 in cash and 800 in checking accounts. Savings accounts hold 1500.
• Find M1.