Money & Monetary Policy Part II: Definitions of Money

AP Macroeconomics

http://en.wikipedia.org/wiki/Money_(Pink_Floyd_song)

Where we came from…

In this Unit, we began by learning about certain aspects of money – the properties and functions of money, to be exact.

http://www.writemoneyinc.com/

Properties of money

Portability – you can take it easily from place to place

Uniformity – it is consistent Durability – will (hopefully) last Stability in value – value holds fairly stable

over time (i.e. doesn’t change constantly) Stability in acceptability – people and

economies accept its value fairly consistently over time

Money has a few functions…

Medium-of-exchange function

Store-of-value function

Unit-of-account function

http://filipspagnoli.wordpress.com/2008/09/01/human-rights-quote-87-trade-liberalization-and-poverty/

Let’s talk about the definitions of money... Monetary aggregates:

overall measures of the money supply, which differ in how strictly money is defined. Two types of money

aggregates: M1 M2

Monetary Aggregates

M1 M2

Let’s talk about the definitions of money... A little something

called “M1” – This is the narrowest definition of money. M1 includes currency, traveler’s checks, and checkable deposits.

How does each of these fulfill the “medium-of-exchange” function?

http://www.salary-money.com/

Let’s talk about the definitions of money...

M2 – this includes M1 and savings deposits, small time deposits (e.g. 401K), money market mutual funds, and other deposits.

Many items in M2 are constrained in their ability to serve as a medium of exchange. For example, time deposits

may require a significant penalty if withdrawals are made before maturity.

http://www.retirementfinances.com/retirement-investing/retirement-mutual-funds

Why is the Fed interested in knowing the size and rate of growth of the $ supply? The size of the money

supply and the rate at which it is growing can have a significant impact on the economic well being of the country!

http://politicalhumor.about.com/od/politicalcartoons/ig/Political-Cartoons/Waiting-for-Economic-Growth.htm

Next steps…

Either alone or with a partner, create a graphic organizer that illustrates what is included in/excluded from M1 and M2.

Explore and view current data on M1 and M2 through the Federal Reserve website: http://

www.federalreserve.gov/

And now…

Some resources:

http://www.reffonomics.com/

Morton workbook Activity 35

Works Cited

Economics of Seinfeld. http://yadayadayadaecon.com/clip/46/

Krugman, Paul, and Robin Wells. Krugman’s Economics for AP. New York: Worth Publishers.

Morton, John S. and Rae Jean B. Goodman. Advanced Placement Economics: Teacher Resource Manual. 3rd ed. New York: National Council on Economic Education, 2003. Print.

Reffonomics. www.reffonomics.com.