DO NOW:
 In 50 words or less, what is MONEY?
THE HISTORY OF MONEY
Video Tutorial:
 ECON LINKS PAGE - VIDEO TUTORIALS…Scroll
down to MACROECONOMICS - Episode #29: What
Is Money (4:28)
 EPISODE #29: WHAT IS MONEY?
…is an object or thing which
is accepted as a payment for
goods or to settle debts
FUNTIONS of MONEY:
 MEDIUM OF EXCHANGE
 UNIT OF ACCOUNT (measure of value)
 STORE OF VALUE
5 characteristics of money:
 Generally acceptable
 Durable (for use in multiple transactions)
 Portable (easy to carry and use)
 Divisible (bills & coins of graduated amounts)
 Scarce
BARTER!
 Trade of goods for other goods
 Inefficient because it requires a DOUBLE
COINCIDENCE OF WANTS (You gotta’ have exactly
what I want, and I gotta’ have exactly what you want
 MONEY replaces barter as a means of acquiring goods
KINDS of MONEY:
 COMMODITY MONEY :
 gets its value from what it’s made from
 a usable good with INTRINSIC value


precious metals like gold, silver
cigarettes or chocolate bars in WWII
 FIAT MONEY:
 gets its value from a legal decree
 little or NO intrinsic or useful value on its own
THE MONEY SUPPLY
 Is the stock of liquid assets in a given economy, which
can be exchanged for goods and services
 It is NOT merely the amount of CURRENCY!
 LIQUIDITY: is how easily an asset can be converted
into currency
 CURRENCY: money in the form of paper or coins
 PAPER MONEY can be backed by


Commodity
Fiat
CURRNECY
money in the form of paper or
coins
can be backed by
 Commodity
 Fiat
Other forms besides currency:
 DEMAND DEPOSITS:
 stored in a bank account
 can be withdrawn at any time upon demand
 Also called CHECKABLE DEPOSITS
 TIME DEPOSITS:
 stored in accounts at banks, but…
 cannot be withdrawn on demand without a substantial
penalty
 Ex.: CD – certificate of deposit – 6 mo., 1 yr., etc.
 MONEY MARKET ACCOUNTS:
 stricter rules than DEMAND, but…
 looser rules than TIME DEPOSITS
THE MONEY SUPPLY:
 M1: extremely LIQUID
 Currency
 Traveler’s checks
 Demand Deposits
 M2: broader and less liquid
 M1 PLUS
 Money in SAVINGS ACCOUNTS & shorter TIME DEPOSITS
(money market accounts)
 M3: M1 and M2 + more ILLIQUID forms (long time
deposits)
 L: broadest definition – M1, M2, M3, and commercial
papers and deeds
The Equation of Exchange:
 MV = PQ
 M= the stock of money (how much)
 V=the velocity of money (how often it turns over or
changes hands)
 Q=is the output of goods and services (quantity)
 P=is the average current price
FRACTIONAL RESERVE BANKING:
 How banks MAKE money (a profit):
 YOU deposit your money at interest
 THEY lend it out or invest it at interest
 The banks PAY you and keep the difference!
 How banks CREATE money (increase the money
supply): through FRACTIONAL RESERVE BANKING
Video Tutorials : Creating Money
with Fractional Reserve Banking
 ECON LINKS PAGE - VIDEO TUTORIALS…Scroll
down and choose MACROECONOMICS: EPISODE
#30: Creating Money (3:55)
 EPISODE #30: Creating Money (3:55)
 ECONOMICS USA SERIES– VIDEO ON DEMAND

Program #20: The Banking System (30:00)
THE RESERVE REQUIREMENT:
 The % of DEMAND deposits which a bank has to keep
on hand in the vault to cover withdrawals
 Rate is set by the FEDERAL RESERVE BOARD
What BANKS do when they can’t
cover all the day’s demands:
 BORROW:
 From the FEDERAL RESERVE BANK
 The DISCOUNT RATE: the interest rate which the Fed
charges banks for loans
 BORROW:
 From OTHER BANKS
 The FEDERAL FUNDS RATE: the interest rate which
banks charge banks
Gresham’s Law
 Sir Thomas Gresham
 bad money drives good money out of circulation.
 THEN…It was about DEBASEMENT
 the reduction of a coin’s precious metal content.
 Because non-debased coins, or ‘‘good money,’’ were
more valuable, people hoarded these coins and spent the
debased ‘‘bad money.’’
 NOW…It’s about INFLATION
CARDS UP! Quiz
 Money
 Fractional Reserve Banking
 1. The direct exchange of goods for other goods
is known as

a. commerce

b. barter

c. finance

d. retail

e. wholesale
 2. Money in the bank serves as a(n)





a. unit of account
b. medium of exchange
c. commodity
d. unit of value
e. store of value
 3. Money used to buy clothing serves as
a(n)

a. unit of value

b. commodity

c. store of value

d. unit of account

e. medium of exchange
 4. The fact that I can spend a hundred dollar
bill and receive a twenty, a ten, three ones, and
forty-nine cents change illustrates which
characteristic of money?

a. scarcity

b. acceptability

c. durability

d. divisibility

e. portability
 5. The ease with which an asset can be
converted into the economy's medium of
exchange is referred to as its

a. transferability

b. exchangeability

c. liquidity

d. acceptability

e. durability
 6. Which of the following forms of money
is the most liquid?

a. time deposits

b. money market accounts

c. traveler’s checks

d. currency

e. demand deposits
7. Which function of money makes
prices possible?
 a. unit of account
 b. medium of exchange
 c. scarcity
 d. store of value
 e. divisibility
8. Which function of money does
inflation most undermine?
 a. scarcity
 b. unit of account
 c. medium of exchange
 d. store of value
 e. divisibility
 9. Money must be able to be used over
and over again without wearing out. This
represents which characteristic of
money?

a. durability

b. acceptability

c. divisibility

d. portability

e. scarcity
10. Money with intrinsic value is
called
 a. fiat money
 b. commodity money
 c. local money
 d. legal money
 e. bullion money
 11. Which of the following is an example of fiat
money?

a. Hershey bars

b. gold

c. yen

d. cotton

e. cigarettes
 12. Money facilitates trade by removing
the need for

a. voluntary exchange

b. a double coincidence of wants

c. property rights

d. supply and demand

e. markets
 13. Devaluing coins by reducing the
amount of precious metal in them and
substituting base metals

a. voluntary exchange

b. a double coincidence of wants

c. debasement

d. hyperinflation

e. liquidity
 14. If the reserve ratio is 10%, a bank with
deposits of $1000 can loan out

a. $10

b. $100

c. $90

d. $900

e. $990
 15. If the reserve ratio is 20%, the money
multiplier is

a. 2

b. 50

c. 5

d. 20

e. 10
 16. If the reserve ratio is 5%, how much
money will be created in the economy by
a deposit of $100?

a. $100

b. $4000

c. $2000

d. $1000

e. $500
17. The equation of exchange is

a. MQ = PV

b. MVP = Q

c. M = VPQ

d. MP = VQ

e. MV = PQ
18. How often money circulates through
the economy; in other words, how many
times a dollar bill is spent in a given time
period:

a. velocity

b. portability

c. durability

d. divisibility

e. scarcity