the mcgraw-hill companies, inc., 2008 mcgraw-hill/irwin chapter 2 money and the payments system
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2-3 Money and the Payments System A Roadmap Money and how we use it The Payments System The Future of Money Measuring MoneyTRANSCRIPT
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© The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin
Chapter 2
Money and the Payments System
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Money and the Payments SystemThe Big Questions
1. What is money?2. How do we use money?3. How do we measure money?
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Money and the Payments SystemA Roadmap
• Money and how we use it• The Payments System• The Future of Money• Measuring Money
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Money:The Definition
Money is an asset that is generally accepted as payment for goods and services or repayment of debt.
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Money:Characteristics
1. Means of payment Used in exchange for goods & services
2. Unit of account Used to quote prices
3. Store of value Used to move purchasing power into the future
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Money:How We Pay for Things (I)
• Commodity Money: Objects with intrinsic value
• Fiat Money: Value comes from government decree (or fiat)
• Checks: Instructions to the bank to shifts funds from your account to that of the person or firm whose name is
written in the “Pay to the Order of” line.
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The Path of a Paper Check
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• Checks are legal proof of payment• Customers wanted them back• Starting in 2004
– Banks can transmit digital images– Substitute checks are proof of payment
• Paper checks are now disappearing
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Money:How We Pay for Things (II)
• Credit Cards• Debit Cards• Electronic Funds transfers
especially automated clearing house (ACH transactions)
• Stored Value Cards• E-Money
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• Debit cards:– Like a check– Electronic message to your bank to
transfer funds immediately• Credit cards:
– Deferred payment– Issuer makes payment for you– You have to pay it back
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•Scan the numbers at the bottom of the check.
•Check Conversion:Turns a check into an ACH transaction
•Similar to using a debit card
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The Future of Money
Which function of money will be with us for a long time?
– Means of payment: disappearing– Unit of account: likely to remain– Store of value: disappearing
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• Technological advances create new methods of payment.
• Cell phones and other types of hand-held mobile devices are providing access to the payments system.
• What will be next?
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Measuring Money
• Changes in the quantity of money are related to – Interest Rates– Economic Growth – Inflation
• How do we measure money?
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Inflation and the Inflation Rate
• Inflation: The rate at which the general price level is increasing over time
• Inflation rate: The measure of the inflation process
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Liquidity:Definition
Liquidity a measure of the ease an asset can be turned into a means of payment (Money).
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The Liquidity Spectrum
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Measuring Money
Different Definitions of money are based upon degree of liquidity.
M1: Narrowest definition Only most liquid assets
M2: Broader definition Includes assets not used
as means of payment.
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Monetary Aggregates
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Growth Rates in M1 and M2
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Money Growth and Inflation
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Money Growth and Inflation
• When inflation is high, money growth helps forecast inflation.
• When inflation is low, the relationship is not as close.
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• In 2007 there was $2500 of U.S. currency in circulation for each U.S. resident.
• As much as 2/3rds of this is abroad
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• The CPI answers the question:"How much more would it cost for people to purchase today the same basket of goods and services that they actually bought at some fixed time in the past?“
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• Computing CPI Inflation– Survey people to see what they bought– Figure out what it would cost to buy the
same basket of goods & service today.– Compute the percentage change in the
cost of the basket of goods.
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Measures of Inflation
• Fixed-weight Index - CPI
• Deflator – GDP or Personal Consumption Expenditure Deflator
• Chain-weight index – Half way between fixed-weight and a deflator.
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© The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin
Chapter 2
End of Chapter