chapter 2

Copyright © 2003 by South-Western/Thomson Learning. All rights reserved.

CHAPTER 2

Principles of Money


The Functions of Money

$

Medium of Exchange

A means of payment; something used in transactions to make payments

Store of Value

Something that retains its value if held

Unit of Account

The accounting unit or standardized measure of value in which prices are quoted


The Monetary Aggregates and Domestic Nonfinancial Debt as of August 2001 (in

Billions of Dollars)

M1Currency in the hands of the public $ 562.4Demand deposits at commercial banks 314.4Other checkable deposits (Deposits that can be withdrawn by unlimited check writing) 257.4Travelers’ checks 8.8

Total M1 $ 1,142.9*

M2M1 plusSmall savings and time deposits ($100,000), including money market deposit accounts $3,144.4Individual money market mutual funds 997.6

Total M2 $ 5,284.9*

M3M2 plusLarge time deposits $804.5Term repurchase agreements and term Eurodollars 586.9Institutional money market mutual funds 997.6

Total M3 7,673.9*DFND

Federal: Credit market debt of the U.S. government and state and local governments $3,349.0Nonfederal: Corporate bonds, Mortgages, Consumer credit (including bank loans),

other bank loans, commercial paper, other debt instruments 15,540.7Total DNFD $18,889.7*

*Numbers may not sum to totals because of rounding.SOURCE: Federal Reserve Statistical Release H.6 (508), Board of Governors of the Federal Reserve (November 1, 2001).


The Relative Size of the Monetary Aggregates and DNFD as of August 2001(in Billions of

Dollars)

19 1817161514131211109876543210

$5,284.9

$1,142.9

$7,673.9

$18,889.7

Billions ofDollars

M1 M2 M3 DNFD


The Monetary Aggregates and DNFD, 1960-2001*

1960 1965 1970 1975 1980 1985 1990 1995 2001*

$18,000

$15,000

$12,000

$9,000

$6,000

$3,000

0

Year*Through August 2001.

M1

M2

M3

DNFD

Billions of Dollars

chapter 2

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