Section 5
The Financial
Sector
Modules 22-29
AP Macro
Nancy K. Ware Instructor
Gainesville High School
Module 23
The Definition and
Measurement of
Money
Module 23 Essential Questions
1.
What is money?
2.
What are the functions of money?
3.
What are the various roles money plays?
4.
What are the many forms money takes in the economy?
5.
How is the amount of money in the economy measured?
Start Up
In the United States, the dollar is
A. Backed by silver
B. backed by gold & silver
C. commodity backed money
D. commodity money
E. fiat money
What is Money? Terms to Understand
Money
Currency in Circulation
Checkable Bank Deposits
Money Supply
Money v. Barter
What is Money? Terms to Understand
Money:
An asset that can be easily used to
purchase a good or a service
Currency in Circulation:
Cash held by the public
Checkable Bank Deposits:
Bank accounts out of which people can write
checks
Money Supply:
total value of financial assets in the
economy that are considered money
Money v. Barter:
Money is more widely accepted.
Barter is exchanged one good of value for
another good of value. Bartering deals with
the problem of “double coincidence of wants”
What is Money?
1. What makes the $20 in your pocket different from your
laptop computer or your cell phone?
2. Money is essentially anything that is easily
e______________ for goods and services.
3. How could you turn your laptop & cell phone into $?
4. What else could you do with your laptop and cell phone?
As we will see, using money helps to e___________ the need
for barter.
What is Money?
1. What makes the $20 in your pocket different from your laptop
computer or your cell phone?
All three are assets, but only the $20 will be accepted by the gas
station as payment for your gasoline and Coke Zero 
2. Money is essentially anything that is easily exchangeable for
goods and services.
3. How could you turn your laptop & cell phone into $?
You could sell your laptop and cell phone, because they have value,
and someone would give you money in exchange, and then you could
buy whatever you wanted with that money.
4. What else could you do with your laptop and cell phone?
Or you could give the gas station your laptop in exchange for the
gasoline, but that is a barter, or the exchange of goods for goods. (is
that a good exchange for you or them?)
As we will see, using money helps to eliminate the need for barter.
3 Main Roles of Money
Functions of Money
Medium of Exchange
Store of Value
Unit of Account
How it Works
3 Main Roles of Money
Functions of Money
Medium of Exchange: asset
used to trade for goods &
services
Store of Value: holds
purchasing power over
time
Unit of Account:
measurement used to set
prices/make comparisons
How it Works
1. Medium of Exchange
An employer exchanges dollars for an hour
of labor.
 You exchange those dollars for a grocer’s
pound of apples.
 The grocer exchanges those dollars for an
orchard’s apple crop, and on and on.
Without money, we would have to make
exchanges in a barter system.
PROBLEM: “Double coincidence of wants.”
You must find someone who wanted what you
had to offer. If there was no one, how would
you get what you needed to survive? This is a
supremely difficult way to obtain wants &
needs.

2. Store of Value


So long as prices are not rapidly
increasing, money is a decent way
to store value. You can put money
under your mattress or in a
checking account and it is still
useful, with essentially the same
value, a week or a month later.
Problem with Barter: If you have
an item to barter with that is
perishable, you have to find
people to exchange with FAST
because if you wait too long, your
item will go bad & lose its value. Is
money perishable?
3. Unit of Account
http://www.automotoportal.com/article/Top_10_most_expensive_cars_in_the_world
Units of currency (dollars, euro, yen, etc)
measure the relative worth of goods and
services just as inches and meters
measure relative distance between two
points.
In the barter system, all goods are
measured in terms of other goods.
Prices in a Barter Economy:
A lb of cheese = dozen eggs =
½ lb of sausage = 3 gallons of milk
…..How do you know what the worth
REALLY is??
With money, the value of cheese, and all
other goods and services, is measured in
terms of a monetary unit like dollars.
Types of Money
•Commodity Money
•Commodity-backed Money
•Fiat Money
1. Commodity Money
Throughout history people
have understood the important
roles that money plays, but
have chosen to use different
types of money within their
societies.
Commodity money: something
used as money, normally gold
or silver, that has intrinsic
value in other uses.
If you didn’t want to use your
gold or silver to purchase
something, you could have it
melted and shaped into a piece
of jewelry or a serving platter.
2. Commodity-backed Money
Commodity - backed money: a
medium of exchange with no
intrinsic value whose ultimate
value was guaranteed by a
promise that it could always be
converted into valuable goods
on demand.
This form of money appeared
similar to our current paper
currency and was used to make
transactions. However, if you
wanted, you could take the
paper currency to a bank and
exchange it for an equivalent
amount of gold or silver.
3. Fiat Money
Fiat money: money whose
value derives entirely from
its official status as a means
of exchange.
This is our paper and metal
money today. It is our money
because the government has
decreed it to be our money.
Everyone accepts it as
payment for nearly anything,
so it serves the purposes of
money.
Interesting Thought….
Measuring the Money Supply
1.
2.
3.
4.
How much money is out there? It depends on what we define
as money. The Federal Reserve, our central bank, has two
aggregate measures of the money supply, _____& ____.
First, we add up the money that is most easily used to make
transactions (the most liquid). M1 = c_________and
c______in circulation + c__________d_________ +
t___________’s checks
Then, the Fed expands the definition to include “near monies”
or forms of money that can fairly easily be converted to cash
(slightly less liquid than M1). Near monies pay i________
while few items in ______pay interest.
M2 = M1 + s________accounts + short-term __________
+ m___________m___________ a__________.
Measuring the Money Supply
1.
2.
3.
4.
How much money is out there? It depends on what we define
as money. The Federal Reserve, our central bank, has two
aggregate measures of the money supply, M1 & M2.
First, we add up the money that is most easily used to make
transactions (the most liquid). M1 = currency and coin in
circulation + checking deposits + traveler’s checks
Then, the Fed expands the definition to include “near monies”
or forms of money that can fairly easily be converted to cash
(slightly less liquid than M1). Near monies pay interest
while few items in M1 pay interest.
M2 = M1 + savings accounts + short-term CDs + money
market accounts
Thar’s N’More Gold!! Inquiry
When did the United States come off the “gold”
standard for good? Under whose administration did it
happen and why?
Thar’s N’More Gold!! Inquiry
When did the United States come off the “gold”
standard for good? Under whose administration did it
happen and why?
Caused by inflation, the oil embargo against the US,
and high levels of spending on the Vietnam War,
during Richard Nixon’s presidency in 1971, the
cancellation of the gold standard was implemented.
The United States dollar could no longer be converted
to gold.
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Module 23 Review Questions p. 235-236
Read Module 24 The Time Value of
Money