Def: Assets widely used and accepted as payment
Money ≠ Wealth
Commodity Money: commodity with intrinsic value
Fiat Money: money without intrinsic value used by government decree
Three Functions of Money
Medium of Exchange
Facilitates the sale/purchase of goods and services
Store of Value
Retains purchasing power over time
Unit of Account
Used to post prices and record debts
Money Supply
Def: Quantity of money available in economy
M1
Currency + demand deposits + other checkable deposits
M2
M1 + savings deposits + other short term savings
Money Demand
Def: quantity of money people want to hold
Demand for Money
- People demand money because they need liquidity
- Cost of holding money is opportunity cost