Money serves as a medium of exchange

Wealth is a stock
Income is a flow

Functions of Money
Medium of Exchange
Unit of Account
Store of Value

Kinds of money
Full-bodied money
= Commodity money
Representative full-bodied money
Fiat money = credit money

M1 – Transactions or Liquid Money
Currency & coin
Checkable deposits
Traveler’s checks
 

M2 – Savings Money (Narrow)
Currency & coin
Checkable deposits
Traveler’s checks
Overnight repurchase agreements issued by commercial banks
Overnight Eurodollar deposits
Non-institutional money market mutual fund shares
Savings deposits & MMDA accounts with limited checking
Small time deposits (<$100,000)

M3 – Savings Money (Broader)
Currency & coin
Checkable deposits
Traveler’s checks
Overnight repurchase agreements issued by commercial banks
Overnight Eurodollar deposits
Non-institutional money market mutual fund shares
Savings deposits & MMDA accounts with limited checking
Small time deposits (<$100,000)
Large time deposits ($100,000 & up)
Term RPs and Eurodollar deposits
Institutional money market mutual fund shares

M1, M2, & M3
M1 assets are the most liquid
M3 assets (i.e., assets special to M3) are least liquid
Assets special to M2 & M3 pay interest
M1 assets do not pay significant interest and are held for transactions needs
Many investment assets are not money, e.g., stocks & bonds

Weighted monetary aggregates
Example (p. 36)
M =
DDO + Cp + 0.50(MMMF) + 0.25(SD + TD)
Sometimes better for forecasting than M1, M2, or M3
Weights less liquid assets less than 1.00