AP Economics
Mr. Bernstein
Module 23:
The Definition and Measurement of Money
February 2016
AP Economics
Mr. Bernstein
The Definition and Measurement of Money
• Objectives - Understand each of the following:
• The definition and functions of money
• The various roles money plays and the many forms it
takes in the economy
• How the amount of money in the economy is measured
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AP Economics
Mr. Bernstein
Roles of Money
• Definition: Money is anything that is easily
exchangeable for goods and services
• Money is NOT the same thing as wealth
• Medium of Exchange
• Eliminates difficulties of barter system
• Store of Value
• Does not decay (other than inflation)
• Measure of the relative worth of goods and
services
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AP Economics
Mr. Bernstein
Types of Money
• Commodity
• ie gold or silver, often has other intrinsic uses
• Commodity-backed money
• No intrinsic value but has promise of ability to be
converted into commodity with value
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AP Economics
Mr. Bernstein
Types of Money, cont.
• Fiat money
• Value derives entirely from its official status as medium
of exchange
• “This note is legal tender for all debts, public and
private.”
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AP Economics
Mr. Bernstein
Measuring the Money Supply
• Monetary Aggregates
• M1 = Currency and coin in circulation + checking deposits
+ traveler’s checks
• M2 includes “near monies” easily exchangeable into cash
and paying interest
• M2 = M1 + savings accounts + short term CDs + money
market accounts
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