Money: Present and Future

Maimoona Sajid
Why Is It Important To Define And Measure
Money?
1. Because money supply and growth rate of
quantity of money affect important economic
of variable. (purchasing power)
2. Also affect the attainment of ultimate national
economic goal. Increase employment, price
stability, nor inflation, not deflation, eco
growth, and an Eq in international payments.
so, we require a meaningful definition what is
essential.
Theoretical definition.
• Knowledge base on logical or mathematical assumption.
Empirical definition.
• Knowledge derived from investigation, observation,
experiment.
1. A close correspondence must exist between theoretical
and empirical definition.
2. Fed must be able to control the empirical defined Q of
money and to meet the target.
3. Fed cannot achieve ultimate national goal.
4. In short successful monetary policy requires that fed
properly measure money and effectively control its
growth rate.
Two approaches to defining and measuring
money.
1. Transaction approach(classical)
• Only those commodity will be included in money
which are just medium of exchange.
• People accept it as a mean of payment for goods
and services.
• So, M = CU+DD
• CU: coins, currency notes, (issue by central bank)
• DD: demand deposit,( issued by commercial bank)
• Classical theorist define it.
2. liquidity approach( Keynes)
• Stress store of value.
• Most liquid approach for assets.
• Liquidity is the property of all assets.
Example: stocks, bonds, non financial asset cars,
house.
• Each have store of value but have different
liquidity.
• Money is most liquid of all assets.
• Because people do not need to convert money in
something else before buying goods and services.
Liquidity and moneyness of money asset.

• Liquidity definition of money- broaden

definition of money.
• “any asset can be considered as money which
is highly liquid and without loss of value
converted into cash”
• So , coins, paper money- as a medium of
exchange meet this requirement.
 How the fed measure money
• Monetary base:
1)the narrowest measure of “money”
2)Which is govt. produced money.
• MB = currency + reserve of depositary institution,
Currency= notes + coins
Notes: fed issue notes by US treasury.
Coins: value of metal face value of coin.
Disappeared from circulation with passage of time.
Reserve of depositary institution,
• Commercial bank
• Saving bank
• Loan association credit union.
“are those fund that issued highly liquid
liabilities called deposit”
• MB: is a foundation of fiduciary system.
• MB: Satisfy the minimum requirement of the
transaction approaches and liquidity
approach.
Transaction approach is beneficial because.

1. Money used to carryout transaction can

easily be controlled by central bank.
2. The relationship b/w money and economic
objectives can easily be predicted.
 Money as a medium of exchange= currency
demand deposit, traveler cheque.
 Money as a store of value= time deposit of
commercial bank + mutual saving banks
accounts + treasure bill.
 currency demand
• deposit, traveler Money as a medium of
exchange cheque.

 time deposit of
commercial bank +
mutual saving
• Money as a store of value
banks accounts +
treasure bill.
 Near money
Near money those assets which experience
slight rise in value is called near money.
For example ; gold, silver.
 The transaction approach; M1
Currency has increase in significance in USA.
M1= currency + transaction actions( demand
deposit + other check able deposit) + traveler
checks.
Transaction actions: although people use
currency for most transaction, because they use
in mainly small transaction. For large
transaction, individual usually transfer fund
from transaction accounts.
• Transaction accounts

Other checkable deposit

Demand deposit (DD)

Negotiable order of Automatic transfer system

withdrawal
(NOW) accounts.
1. Demand deposit (DD) could not pay Interest
rate
• People can convert such deposit to currency
on demand.
• Older money and borrowing texts emphasized
the distinctions b/w commercial bank and all
other depositary institution because
commercial bank are only who accept (DD)
until 1981.
• Savings banks, saving and loan association and
credit union( thrift institutions) now offer DD.
2. Other checkable deposit.
• Deposit accounts.
• Pay interest.
• Unlimited number of cheques maybe written.
This includes,
A. Negotiable order of withdrawal (NOW)
accounts.
• Are interest bearing saving accounts on
which people may write cheques.
B. Automatic transfer system,(ATS)
• Saving account
interest bearing + non interest
bearing.
• Funds automatic transfer from
saving to checking accounts.
• ATS use to aviod hassels and save
time
 Travelers check:
Medium of exchange utilize as an alternative to
hard currency.
• Travelers often used travelers checks on
vacation to foreign countries instead of cash.
• 1891, American Express introduced:
• It offers safe way to take currency overseas
 Why has there been such a large
expansion of the use of currency during
recent decades?
Ans: increased size of the so called underground
economy
The growth in the underground economy.
• Underground/subterranean economy
• Each transaction that individual do not report
to the FBR as income, drugs sales, tax
evasion, payment of wages to illegal
immigrates.
 M2; The liquidity Approach:
M2:
M1 Narrow definition of money- does not
include so called near money- liquid assets
So, need better def. which shows the changing in
eco activity.
 Difference B/W M1 and M2
M1:
It is the physical money supply
It is not near money assets which can readily be converted
into cash such as bills of exchange
M2:
Include near money + cash and cheques deposits
In near money includes saving deposits + money market
deposit cheques + small denomination + overnight
repurchase agreement+ overnight euro.
 Not as suitable medium of exchange but quickly converted
into cash
M2= M1+Money Market deposit account + Saving
Accounts + Small domination time deposits+ Overnight
Repurchase agreement + Overnight Euro+ Money Market
mutual funds.
Money Market deposit account:
• Account issued by banks and thrift institutions.
Accounts that exceed
• No minimum Maturity limitation offer fee or
closed
• Allow limited checking privileges
• Pay on i rate
• These accounts offer the benefit of saving and current account.
• Customer earns interest rate
• Offer increase in i than a regular saving account
Saving Accounts:
Two types
1. Statement Saving account:
• Depositors receives monthly statement of deposit
• i earned during month
2. Passbook saving deposits
• Lower i rate
• Do not receive monthly statements
• Owner physically present a paper passbook each
time he or she make deposit
• More popular
Small domination time deposits:
• Saving Certificate + Small certificate
of deposits
• Set maturities
• Date of issue+ maturity date+
contractual matters
• Cannot with withdrawal before
maturity date.
Overnight Repurchase agreements:
• Repo allows a bank to sell treasury or
federal agency securities to its customer
• And then repurchase then a higher price
that included accumulated interest.
• Financial institutions do this in order to
raise short term capital
• Financial innovation
Overnight Euro:
• Type of short term loan which used in money market
where by the sellers of security agrees to buy in bank
at a specified price and time.
• Sellers pay an i rate called repo rate. When buying
bank of securities.
Money Market Mutual funds:
• People keep money in form of shares.
• Short term debt instrumental 1day to1year
• Which invent only in money market
Example: Short term obligation, Munciple
Cheques
 Difference between M2 and M3
• M2 included M1
• Short term time deposits
• 24 hour money market funds

• M3 include M1 and M2
• Long term time deposits
• More than 24 hour maturity
M3: An Even Broader Definition of Money

M3= M1+M2+Large denomination

+ Term Repurchase agreement at
Commercial banks + Saving Banks +
Term Euro Dollars + Institution-only
money market mutual fund
balances.
 Large Denomination:

• It is negotiable
• Buy or sell with set maturities that have
denominations greater than $100,000.
• Example: Jumbo certificate of deposits,
• Issued to businessman that mature at specific
date because to save idle resources funds
Term Repurchase agreement at Commercial banks:
• Similar to overnight Repo
• But longer than overnight
• Time period different
• Maturity average to a month
Term Euro dollars:
• Same to overnight dollars
• Maturity week or month
Institution-only money market
mutual fund balances.
Held institutions rather then
individual.
 Distinguishes Items Between B/W M3 And M2 ?

Ans: Liquidity
 Term RPs and Term Euro dollars less liquid
than overnight RPs and overnight eurodollers
because they have longer terms of maturity
A Measure of Liquidity L:
L consist of M3+ other liquid assets.
So, What is the best definition ?
 A Measure Of Liquidity :L
• The federal reserve system used a broad definition of
liquidity and label it L.
MONEY AND OTHER ECONOMMIC
VERIAVLBLE.
• A significant problem for choosing the best measure of
money is that there is mixed evidence about which
aggregate is most closely and predictably related to
national economic goal. In some period M1 seems to
relate money more closely; in other periods a narrower
or broad monetary aggregate seems to predict better .
• In recent year the one point of which most
economics have agreed is that M1 has not
very good indicator of other economic
variable. Beyond this point, however this is
sharp disagreement. Other, In contrast, claim
that a broader aggregate such as M2 or M3 is
preferable.
ALTERNATIVE TO SIMPLE-SUM MONETARY
AGGREGATE.
• Because the monetary base, M1, M2, M3, and
L are sum of different components, economics
call them simple-sum monetary aggregate. In
recent year economics have experimented
with construction of alternative monetary
aggregate, called divisia aggregate.
Controllability of monetary aggregate.
• One reason that is a simple sum
measure of money such as M1 or M2
continues to receive the most attention
from the FED is that experience with
three measure has taught the FED how
policy action influence them.
 THE FUTURE OF MONEY.
• When the technology for making transaction
improve, society tend to adopt more “high
tech” means of trading goods and services,
lowering the minimum exchange cost. As a
result the time people spend making exchange
falls.
• We live in a high-tech or information age, it is
natural to expect that our society has found
imaginative to lower exchange cost and the
amount of time spent making exchanges.
• Electro means of payment- payments through
transmitting electro impulses, instead of
pieces of paper or coins, over wires people
and their computer- accounted for less than
one-half of one percent of transaction in the
US economy.
• There are a verity of means of payment beside
cash and checks, credit cards with which many
of us are acquainted and money order.
• People accomplish credit card or money order
transaction on paper these similar to cash or
checks, are non-electronic means of payment .
They can use the service of automated
clearing houses, which are electronic
processing intermediaries between sender of
funds and ultimate receiver.. Alternatively,
they can bypass these intermediaries by
sending fund directly, via wire transfer(for
instance, over telephone lines).
• The technology also existed to transmit funds
directly from a bank account to a firm when a
customer purchases a good or service. This is
called a point of sale transfer. A person and
firm could accomplish this by using a plastic
card with an account number magnetically
encoded.
• Some people also arrange for their
depositary institutions to pay some
of their bills from their deposit
account, automated teller machine
bill payment is one way to do this .
people also do not widely use this
type of electronic means of payment
at present.
 THE CASHLESS SOCIETY.

• A couple of decade ago, one would commonly

encounter speculation that by the end of the
twentieth century people would no longer use
cash and checks-nor any other forms of paper
or coin- as a media of exchange.
• A cashless society describes an economic state
whereby financial transactions are not conducted
with money in the form of physical banknotes or
coins, but rather through the transfer of digital
information (usually an electronic representation
of money) between the transacting
parties. Cashless societies have existed from the
time when human society came into existence,
based on barter and other methods of exchange,
and cashless transactions have also become
possible in modern times using digital currencies
 such as bitcoin