Download 16.3 Money, Near Money, and Credit Cards

16.3 Money, Near Money,
and Credit Cards
Objectives
 Describe the narrow definition of money.
 Explain why distinctions among definitions
of money have become less meaningful
over time.
CONTEMPORARY ECONOMICS
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16.3 Money, Near Money,
and Credit Cards
Key Terms
 M1
 checkable deposits
 M2
CONTEMPORARY ECONOMICS
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16.3 Money, Near Money, and Credit Cards
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Narrow Definition of Money: M1
Money aggregates are various measures
of the money supply.
The narrow definition, called M1, consists
of currency (including coins) held by the
nonbanking public, checkable deposits,
and traveler’s checks.
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16.3 Money, Near Money, and Credit Cards
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Currency in Circulation
Dollar bills and coins in circulation are part
of the money supply as narrowly defined.
Money in bank vaults or on deposit at the
Fed is not in circulation as a medium of
exchange and so is not counted in the
money supply.
Currency makes up about half of M1.
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16.3 Money, Near Money, and Credit Cards
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U.S. Currency Abroad
 More than half of all Federal Reserve notes,
particularly $100 notes, are in foreign hands.
 Wealthy people around the world, especially in
unstable countries or countries that have
experienced high inflation, often hoard U.S.
currency as insurance against hard times.
 Some countries, such as Panama, Ecuador, and
El Salvador, even use U.S. dollars as their own
currency, a process called dollarization.
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16.3 Money, Near Money, and Credit Cards
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Counterfeiting
Improvements in copy machines,
computers, and printers allow even
amateurs to make passable counterfeits of
U.S. currency.
U.S. currency is being redesigned to make
it harder to copy.
The Fed and the Treasury have
announced plans to redesign the currency
every 7 to 10 years.
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16.3 Money, Near Money, and Credit Cards
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Checkable Deposits
 Checkable deposits—deposits in financial
institutions against which checks can be written
and ATM, or debit, cards can be applied
 About half of checkable deposits are demand
deposits.
 In recent years, banks have developed other
types of checking accounts,
 Checkable deposits of all types make up nearly
half of M1.
CONTEMPORARY ECONOMICS
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16.3 Money, Near Money, and Credit Cards
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Traveler’s Checks
 Users sign traveler’s checks twice.
 Once at the bank at the time of purchase
 Again when the check is spent
 A merchant compares the two signatures to
confirm the user is the rightful owner.
 Traveler’s checks are safer than cash because
they can be replaced in the event of loss or theft.
 Traveler’s checks are a tiny part of the money
supply—only about 1 percent of M1.
CONTEMPORARY ECONOMICS
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16.3 Money, Near Money, and Credit Cards
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Broader Definitions of Money: M2
M2—A broader definition of the money
supply, consisting of M1 plus savings
deposits, small-denomination time
deposits, and money market mutual fund
accounts owned by households
CONTEMPORARY ECONOMICS
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16.3 Money, Near Money, and Credit Cards
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Savings Deposits
Savings deposits earn interest but have no
specific maturity date.
This means that you can withdraw them
any time without a penalty.
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16.3 Money, Near Money, and Credit Cards
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Time Deposits
Time deposits earn a fixed rate of interest
if held for a specified period.
The holding period ranges from several
months to several years.
Holders of time deposits are issued
certificates of deposit, or CDs for short.
Early withdrawals are penalized by forfeiture
of several months’ interest.
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16.3 Money, Near Money, and Credit Cards
Money Market
Mutual Fund Accounts
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Money market mutual fund accounts are
another component of the money supply
more broadly defined as M2.
Funds deposited in these accounts are
used to purchase a collection of short-term
interest-earning assets by the financial
institution that administers the fund.
CONTEMPORARY ECONOMICS
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16.3 Money, Near Money, and Credit Cards
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Debit Cards but Not Credit Cards
 A credit card itself is not money.
 Using a credit card is a convenient way of obtaining a
short-term loan from the card issuer.
 You don’t use money until you pay your credit card
bill.
 The credit card has not eliminated your use of money.
 It has merely delayed it.
 When you use a debit card you draw down your
checking account—part of M1.
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Electronic Money
Much of modern money consists of
electronic entries in bank computers.
So, money has evolved from a physical
commodity to an electronic entry.
Money today not so much changes hands
as it changes computer accounts through
electronic funds transfers.
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