Question

What is the definition of money in the United States? Does it correspond to what you thought it was before you read Chapter 14? What are the benefits of fiat money?

https://www.federalreserve.gov/faqs/money_12845.htm (Links to an external site.)

https://www.federalreserve.gov/releases/h6/current/default.htm

Answer 1

Definition of money in the United States:

In the United States, the money supply is defined as:

M1:

(1) currency outside the U.S. Treasury, Federal Reserve Banks, and the vaults of depository institutions;

(2) traveler's checks of nonbank issuers;

(3) demand deposits at commercial banks (excluding those amounts held by depository institutions, the U.S. government, and foreign banks and official institutions) less cash items in the process of collection and Federal Reserve float; and

(4) other checkable deposits (OCDs), consisting of negotiable order of withdrawal (NOW) and automatic transfer service (ATS) accounts at depository institutions, credit union share draft accounts, and demand deposits at thrift institutions.  

M2:

(1) M1

(2) savings deposits (including money market deposit accounts);

(3) small-denomination time deposits (time deposits in amounts of less than $100,000), less individual retirement account (IRA) and Keogh balances at depository institutions; and

(4) balances in retail money market mutual funds, less IRA and Keogh balances at money market mutual funds.

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The definition of money as adopted in the United States does not correspond to what I thought.

I thought it is simply the cash that one holds in hand. The definition of money has wider dimensions and includes assets other than cash in hand.

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Fiat Money is a kind of currency, issued by the government and regulated by a central authority such as a central bank.

The benefits of fiat money are:

i) It is generally acceptable in general transactions

ii) It helps overcome the double coincidence of wants

iii) It is easy to carry and act as a store of value

iv) It can be exchanged for foreign currency

v) It helps the government to devise an appropriate monetary policy to ensure stable economic growth with moderate inflation and help the central bank to manage economic variables such as credit supply, liquidity, interest rates, and money velocity.

vi) It has excellent seigniorage.

vii)