Money and Banking— Monetary Policy Section 5 Modules 23-25

Currency Video Notes  1. What did we use before currency?  2. The first coins were minted around (place and time)?  3. What is considered currency?  4. Our money is _____money. It has value because the gov’t gives it value.  5. Bills are made of what two things?  6. How much counterfeit money is in circulation?  7. What is done to combat counterfeiting?  8. Many European countries use the same currency, the _____________.

Currency

Functions of Money  1. Medium of exchange -- used for buying and selling g & s  2. Unit of account -- prices are quoted in dollars & cents  3. Store of value -- allows purchasing power to be stored until needed (liquid)

Characteristics of Money  1. portability—easily transferred  2. durability—should not deteriorate when being used as a store of value  3. divisibility—easily broken down into smaller units  4. limited availability--$ decreases in value when there is too much of it

Durable, Portable, Divisible and Limited Availability

10 things about money  things you might not know things you might not know things you might not know

Supply of Money—M1  Includes currency and checkable deposits  1. currency (coins & paper) held by public  A. Is “token” money “fiat”  Ex: The metal in a dime is worth less then 10 cents.  B. All paper currency consists of Federal Reserve Notes issued by the FED

Supply of Money—M1  2. Checkable deposits are included since they can be spent almost as readily as currency & can be changed into currency  A. Commercial banks are a main source of checkable deposits for households and businesses  B. Thrift institutions also have checkable deposits (savings and loans, credit unions, etc.)

Supply of Money—M1  3. Currency and checkable deposits held by the federal gov’t or FED are not included in M1

M2  M2 = M1 + 1.Savings deposits & money market deposit accounts 2.Certificates of deposit < $100, Mutual Funds

Importance  M2 is watched closely by the FED to determine monetary policy

Credit Cards  Are they money?  No, they are short term loans  Allow the owner to keep M1 levels low since they need less for daily purchases

What “backs” the money supply?  consumer confidence in the gov’t ability to keep its value stable