ECON30005 · Money and Banking
Money: Definitions, Functions and Evolution
Week 1 sets the vocabulary the whole subject is written in: the economic definition of money (anything generally accepted in payment), its three functions, and how it is measured. Expect true/false statements distinguishing money from wealth or income, short-answer items naming which function a scenario emphasises, and computation of the RBA monetary aggregates M1, M3 and broad money from their components. This foundation underpins the quantity theory, money demand and every later measure of the money stock.
What this chapter covers
- 01The economic definition of money: anything generally accepted as payment for goods and services or repayment of debts (distinct from wealth or income)
- 02The three functions of money: medium of exchange (resolves the double coincidence of wants), unit of account (N prices instead of N(N−1)/2), store of value (differs by liquidity)
- 03Desirable characteristics: standardised, divisible, portable, durable, widely accepted
- 04Evolution: commodity money → fiat money → cheques → electronic payment → e-money → cryptocurrency, stablecoins and CBDCs
- 05US Fed aggregates: M1 = currency + demand and other liquid deposits; M2 = M1 + small time deposits + retail money-market funds
- 06RBA aggregates: currency; M1 = currency + current deposits; M3 = M1 + other bank deposits + credit-union/building-society deposits; broad money = M3 + other deposit-like borrowings
- 07Authorised deposit-taking institutions (ADIs) and the direct- vs indirect-finance flow of funds
Computing the RBA monetary aggregates from components
- +1M1 = currency + current (cheque) deposits at banks = 90 + 410 = 500 ($bn). M1 is the narrowest transactions measure: cash plus the deposits you can spend directly.
- +1M3 adds the less-liquid bank deposits and the non-bank ADI deposits: M3 = M1 + other bank deposits of the private non-ADI sector (incl. CDs) + credit-union/building-society deposits = 500 + 1600 + 100 = 2200 ($bn).
- +1Broad money adds the remaining deposit-like borrowings: broad money = M3 + other deposit-like borrowings = 2200 + 300 = 2500 ($bn).
- +1Interpretation: each aggregate nests the previous one (currency ⊂ M1 ⊂ M3 ⊂ broad money), adding progressively less-liquid claims. Bank deposits, not currency, dominate the broader measures — most money in a modern economy is a bank liability, not cash.
Key terms
- Medium of exchange
- The function of money that lets it be given in payment, removing the need for a double coincidence of wants in barter and so lowering transaction costs and enabling specialisation.
- Unit of account
- The function by which prices are quoted in money. With N goods a barter economy needs N(N−1)/2 relative prices; money reduces this to N money-prices.
- Store of value
- The function of holding purchasing power over time. Any asset can store value, but assets differ in liquidity; how well money serves this role depends on inflation.
- Fiat money
- Government-issued legal tender not convertible into a commodity and with no intrinsic value; it became the global standard after the collapse of Bretton Woods in the 1970s.
- Monetary aggregate
- An official measure of the money stock at a chosen breadth. The RBA reports currency, M1, M3 and broad money, each nesting the previous and adding less-liquid deposit claims.
- Authorised deposit-taking institution (ADI)
- A body the regulator licenses to take deposits from the public (banks, credit unions, building societies). The RBA aggregates distinguish deposits at banks from those at other ADIs.
Money: Definitions, Functions and Evolution FAQ
How is money different from wealth or income?
Money is the narrow set of things generally accepted in payment — currency and spendable deposits. Wealth is a stock of all stores of value (money plus bonds, shares, property), and income is a flow received per period. A statement that 'a rich person has a lot of money' confuses wealth with money; in this subject money is the means of payment, not net worth.
Why does the unit-of-account function save so many prices?
In pure barter with N goods you would need a relative price for every pair, which is N(N−1)/2 prices. Choosing one good as the unit of account means every other good has a single money-price, so there are only N prices. That reduction is one of the main efficiency gains from money and a common short-answer point.
Are cryptocurrencies and stablecoins 'money'?
By the economic definition, only if they are generally accepted in payment. A cryptocurrency uses a distributed ledger and has no central issuer or redeemable claim on fiat, so its value is set by market demand and it is volatile as a store of value. A stablecoin is designed to hold value against a fiat peg. A central bank digital currency (CBDC) is a digital form of fiat issued by the central bank. The subject treats these as evolving forms of the payment system rather than settled money.
Can AI help me with Week 1 of ECON30005?
Yes, as a study aid. Sia can drill the three functions of money on fresh scenarios, quiz you on which claim belongs in RBA M1 versus M3 versus broad money, and check your aggregate calculations. Use it to rehearse the definitions and the measurement, not to answer graded quizzes for you, and confirm assessment details on Canvas.
Exam move
Lock down the definitions first — they seed the true/false section. Be able to state the three functions and give one crisp scenario for each, and be able to justify why deferring purchasing power is store of value while settling a transaction is medium of exchange. For the aggregates, practise both the US (M1/M2) and the RBA (currency/M1/M3/broad money) ladders and compute them from components until the nesting is automatic; the examinable trap is double-counting a deposit class. Keep a short list of the evolution of money (commodity → fiat → electronic → e-money → crypto/stablecoin/CBDC) with one distinguishing feature each. This is a memorisation-light, precision-heavy week — the marks go to using the exact definition. Confirm the assessment structure on Canvas.
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