Money Makes the
World Go ‘Round
What is money?
• With a partner, come up with a definition of money
Money is…
• 1) A medium of exchange
• Money is acceptable as a form of payment
• 2) A unit of account
• Society uses money as a yardstick for measuring the relative worth of
a wide variety of goods
• 3) A store of value
• Enables people to transfer purchasing power from the present to the
future
• People save their money so they can buy things later
Money
• Definition = M1
• M1 consists of currency (coins and paper money) and all
deposits in a bank
History
• Since modern money is the paper form of bartering for goods
based on their value…
• Historically, anything could be used as money, including:
• Livestock
• Grains
• Beads
• Stones
• Whale’s teeth/ivory
• Furs
• Cowry shells
• Precious metals
• Salt
• Spices
Currency
• Currency is broken down into two items:
• 1) Token money = coins
• The intrinsic value of the coin is worth more than the metal itself
• 2) Federal Reserve Notes = paper money issued with
Congress’ authorization
• Paper money consists of 46% of the U.S. economy M1 supply
Checkable Deposits
• The largest component of the M1 supply
• Deposits made by check placed into a bank account
• Recap: M1 = currency + checkable deposits
M2
• M2 = M1 + savings deposits (including MMDAs) + small time
deposits + MMMFs
• Three categories:
• 1) Savings deposits and a money market deposit account
• MMDA = an interest-bearing account that pays higher interest than a
typical savings account. Acts like a checking and a savings account.
• 2) Money Market mutual funds
• An investment whose objective is to earn interest for shareholders
• An easy place for people to invest in easily accessible cash-equivalent
assets
• 3) Small (less than $100,000) time deposits
• Funds from time deposits become available when they mature, and there
are withdrawal limitations
M3
• M3 = M2 + large time deposits
• Large time deposits = $100,000 or more
The Ascent of Money
• The Ascent of Money