money and banking— monetary policy section 5 modules 23-25

Money and Money and Banking—Banking—

Monetary PolicyMonetary PolicySection 5 Modules 23-25

Currency Video NotesCurrency Video Notes 1. What did we use before currency?1. What did we use before currency? 2. The first coins were minted around (place and 2. The first coins were minted around (place and

time)?time)? 3. What is considered currency?3. What is considered currency? 4. Our money is _____money. It has value 4. Our money is _____money. It has value

because the gov’t gives it value.because the gov’t gives it value. 5. Bills are made of what two things?5. Bills are made of what two things? 6. How much counterfeit money is in circulation?6. How much counterfeit money is in circulation? 7. What is done to combat counterfeiting?7. What is done to combat counterfeiting? 8. Many European countries use the same 8. Many European countries use the same

currency, the _____________.currency, the _____________.

Functions of MoneyFunctions of Money

1. 1. Medium of exchange Medium of exchange -- used for -- used for buying and selling g & sbuying and selling g & s

2. 2. Unit of account -- Unit of account -- pricesprices are quoted in are quoted in dollars & centsdollars & cents

3. 3. Store of value Store of value -- allows purchasing -- allows purchasing power to be stored until needed (liquid)power to be stored until needed (liquid)

Characteristics of MoneyCharacteristics of Money

1. 1. portabilityportability—easily transferred—easily transferred 2. 2. durabilitydurability—should not deteriorate —should not deteriorate

when being used as a store of valuewhen being used as a store of value 3. 3. divisibilitydivisibility—easily broken down into —easily broken down into

smaller unitssmaller units 4. 4. limited availabilitylimited availability--$ decreases in --$ decreases in

value when there is too much of itvalue when there is too much of it

Durable, Portable, Divisible and Limited Availability

10 things about money10 things about money

things you might not know

Supply of Money—M1Supply of Money—M1

Includes currency and checkable depositsIncludes currency and checkable deposits 1. currency (coins & paper) held by public1. currency (coins & paper) held by public

A. Is “token” money “fiat”A. Is “token” money “fiat” Ex: The metal in a dime is worth less then 10 cents.Ex: The metal in a dime is worth less then 10 cents.

B. B. All paper currency consists of All paper currency consists of Federal Reserve Federal Reserve Notes Notes issued by the FEDissued by the FED

Supply of Money—M1Supply of Money—M1

2. Checkable deposits are included since 2. Checkable deposits are included since they can be spent almost as readily as they can be spent almost as readily as currency & can be changed into currencycurrency & can be changed into currency A. Commercial banks A. Commercial banks are a main source of are a main source of

checkable deposits for households and businessescheckable deposits for households and businesses B. Thrift institutions B. Thrift institutions also have checkable deposits also have checkable deposits

(savings and loans, credit unions, etc.)(savings and loans, credit unions, etc.)

Supply of Money—M1Supply of Money—M1

3. Currency and checkable deposits held by 3. Currency and checkable deposits held by the federal gov’t or FED are not included in the federal gov’t or FED are not included in M1M1

M2M2

M2 = M1 + M2 = M1 + 1.1. Savings deposits & money market deposit Savings deposits & money market deposit

accountsaccounts

2.2. Certificates of deposit < $100,000Certificates of deposit < $100,000

3.3. Mutual FundsMutual Funds

ImportanceImportance

M2 is watched closely by the FED to M2 is watched closely by the FED to determine monetary policydetermine monetary policy

Credit CardsCredit Cards

Are they money?Are they money? No, they are short term loansNo, they are short term loans

Allow the owner to keep M1 levels low since Allow the owner to keep M1 levels low since they need less for daily purchasesthey need less for daily purchases

What “backs” the money supply?What “backs” the money supply?

consumer confidenceconsumer confidence in the gov’t ability to keep in the gov’t ability to keep its value stableits value stable