Money, Banking, and Finance Chapter 11

Figure 11.1 The Liquidity Continuum

Currency
Real Estate
Checking Account
Share of Stock
Precious Metal
More
Liquid
Less
Liquid
Liquidity Continuum

• Items more to the left are more liquid or, in other words, more easily used to purchase something of value. The farther to the right on this continuum, the less liquid the item is. Currency is as liquid as it gets, and real estate is usually about the most difficult asset to convert to money (seldom taking less than a few months).

Do You Use Money if You Use a Credit Card to Make a Purchase?

No!

• one is taking out a temporary loan from the credit card company
• only one day a month, when you send a check or electronic transfer to your credit card company from your checking account, you make a “money” transaction

Bank Deposits and Money

• Dank deposits fulfill the criteria for money
• Store of value
• Widely accepted in payment
• Unit of account
• But: deposits have a different degree of liquidity; not all can be used for payment
• What do we count as money?
• Pragmatic solution: different monetary aggregates which include bank deposits with different kinds of maturities

Monetary Aggregates: The Example of the euro area, in Billion €

	Mid 2009		March 2013
Cash in Circulation	733.6		866.7
+ Overnight Deposits	3606.7		4336.0
= M1	4340.3		5202.7
+ Deposits with agreed maturity up to 2 years	2134.9		1784.9
+ Deposits redeemable at a period of notice up to 3 month	1722.9		2102.2