ChapterChapter

Money & BankingMoney & Banking

14

Objectives:

list the types of moneyidentify the characteristics of moneylist the 3 basic ways economists measure

the money supplycalculate how the money supply grows

using the simple money multiplier

Types of MoneyMoney: item used to buy goods and services

Commodity Money: money with an alternative use

Representative Money: money backed by something valuable

Fiat Money: money that is valuable because the Government backs it

Legal Tender: paper money and coins used within a nation

Roles of Money:

• Medium of Exchange: way of buying stuff

• Store of Value: holds the same value over time

• Unit of Account: consistent way of understanding prices

What makes Money Valuable?

• Widely Accepted

• Holds Value

• Durable

• Portable

• Divisible

The Money Supply

Type of Money Definition Example

M1 Transactions money-liquid assets

Currency in circulation and traveler’s checks

M2 Broader measure M1 + savings accounts

M3 Even less liquid M1 + M2 + retirement accounts and other assets that are difficult to convert to cash

How Banks Work

Banks use your deposited money to make loans

Simple Money Multiplier:

SMM Example: