ECO 001 Lecture Notes - Lecture 8: Debit Card, Money Supply, Savings Account
Lesson 8: Money and the Fed
Jadzia Wray
Monetary Policy – relates to money
1.) What is Money?
You want money to be all of these things. Must be durable (last, don’t get
destroyed easily), divisible (can divide the money easily and have change),
portable (can carry it around), acceptable (everyone must accept it), limited
(don’t want money to grow on trees because then no one would work). Gold
satisfies all these things. For our money, it is all of these things. If something
does these three things, then it is money.
a. Medium of Exchange
Money is an item that you use to get good and services.
Ex: gold
b. Unit of Account
It’s easy to compare things using money.
Ex: want to buy a cow. One person says it is worth 10 chickens,
another says it’s worth a cow. You don’t know the better deal. If
one person says it’s worth $10 and another says it is $20, you
obviously know which is better.
c. Store of Value
Can save it for future use. Doesn’t degrade.
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2.) Money = currency + checkable deposits = M1 (one way to measure money
supply)
Currency – what is considered money. It is only 10% of money supply
Checkable Deposits – what you are paid is this. It goes to your checking
account. Same as cash (just doesn’t look like it) because you can use it
as a medium of exchange. Can use debit card to take money out of it.
***M2 = M1 + Near Money***
- M2 = M1 (cash and money in your checking account) + Near money (money
in your savings)
Liquid money – easily converted to cash
The less liquid something is – the harder it is to convert to cash. Ex: house
3.) Is “Near Money” something you want?
Near money – something you want because it is what is transferred from one
account to yours. Near money is money put in your savings account.
4.) What gives money its value? Commodity vs. Fiat Money
Commodity – ex: gold, oil, rice, silver, wheat = things that aren’t money but have
value.
Gold is not considered money right now because it is not used as a medium of
exchange right now.
Representative money – money represents a commodity.
Fiat money – “because the government said so.” Our money today is backed by
nothing – just faith in the government.
find more resources at oneclass.com
find more resources at oneclass.com
Document Summary
You want money to be all of these things. For our money, it is all of these things. If something does these three things, then it is money: medium of exchange. Money is an item that you use to get good and services. One person says it is worth 10 chickens, another says it"s worth a cow. If one person says it"s worth and another says it is , you obviously know which is better: store of value. Money = currency + checkable deposits = m1 (one way to measure money supply) Checkable deposits what you are paid is this. Same as cash (just doesn"t look like it) because you can use it as a medium of exchange. Can use debit card to take money out of it. M2 = m1 (cash and money in your checking account) + near money (money in your savings) The less liquid something is the harder it is to convert to cash.