Understanding Money and Banking Concepts
Classified in Economy
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Money
A commonly accepted medium of exchange.
Merchandise Money
It has the same value as the monetary unit as merchandise (hardness, portability, divisibility, homogeneity, limited supply).
Fiat or Token Money
A good that has little value as a commodity but keeps its value as a medium of exchange because people have faith in the issuer who guarantees the value of the paper or coins and ensures the quantity is limited.
Full-Bodied Paper Money
Certificates of paper that were backed by gold deposits of equal value to the certificates.
Promissory Note Money
Medium of exchange for the debt of a company or person.
Banking
Bank debt is what allows the depositor to withdraw an amount of money upon request.
Legal Tender
Token money issued by an institution that monopolizes its release and takes the form of coins or banknotes. In the Eurozone, the European System of Central Banks is responsible for issuing legal tender, with the European Central Bank being its main component.
Deposits
Checking Accounts
Accounts where the owner has immediate availability of funds.
Savings Deposits
Offer more interest but restrict access to funds for a period.
Term Deposits
Funds deposited for a fixed period that cannot be withdrawn before the agreed time without a penalty.
Liquidity
An asset's ease and certainty of being converted into cash without loss; the ability to obtain money quickly.
Money Supply
The total amount of money held by people and companies plus deposits in banks.
Monetary Aggregates
Variables that quantify the amount of money in an economy:
M1
Composed of coins and banknotes in circulation + demand deposits.
M2
Composed of M1 + term deposits up to two years + deposits redeemable at notice up to three months.
M3
Composed of M2 + repurchase agreements (repos) + holdings in money market funds and money market instruments + debt securities up to two years.
Bank Reserves
Cash held by the credit system, i.e., the paper money and coins held by banks.
Monetary Base
Cash in bank reserves + cash in the hands of the public; the total amount of paper money and coins in existence.