Module 23
The Definition and
Measurement of
Money
KRUGMAN'S
MACROECONOMICS for AP*
Margaret Ray and David Anderson
What you will learn
in this Module:
• 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
What is money?
• Money
• Currency in Circulation
• Checkable Bank Deposits
• Money Supply
• Money v. Barter
Roles of Money
•Medium of Exchange - Your employer
exchanges dollars for an hour of your labor
•Store of Value - So long as prices are not
rapidly increasing, money is a decent way to
store value
•Unit of Account - 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.
Types of Money
•Commodity Money - something used as money,
normally gold or silver, that has intrinsic value in
other uses
•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
•Fiat Money - that a government has declared to
be legal tender, despite the fact that it has no
intrinsic value and is not backed by reserves.
Measuring the Money Supply
•Monetary Aggregates
•M1 - currency and coin in circulation +
checking deposits + traveler’s checks
•M2 = M1 + savings accounts + shortterm CDs + money market accounts
•near moneys - Near monies pay interest
while few items in M1 pay interest