1. Money and Banking Monetary Policy
Krugman Section 5 Modules 23-25

2. How much money is there on Earth? Video by V-Sauce

3. 1. On average, how much money does a bank have in its vault
1. On average, how much money does a bank have in its vault?  (from ____ to ______)
2. How much change does the typical American household have laying around?
What does M1 include?
What does M2 include?
How can a person increase or decrease the money supply (this is illegal)?  
We’ve heard that bills have traces of drugs on them.  Why is the percentage so high?
Why is money so dirty?
Give an example of commodity money:  
We use _____________________ money.
What gives our type of money value?  

5. Take out a dollar bill if you have one.

15. 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 _____________.

16. Currency

17. 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) 17

18. 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

19. Durable, Portable, Divisible and Limited Availability

20. 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 than 10 cents.
B. All paper currency consists of Federal Reserve Notes issued by the Fed

21. 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.)

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

23. M2 M2 = M1 + Savings deposits & money market deposit accounts
Certificates of deposit < $100,000
Mutual Funds

24. Importance
M2 is watched closely by the Fed to determine monetary policy

25. 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

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