Transcript money - cungeheier

Pump Primer
• Define Money & Explain its
Function.
Module 23
The Definition and
Measurement of
Money
KRUGMAN'S
MACROECONOMICS for AP*
Margaret Ray and David Anderson
Biblical Integration
• The Bible warns against covetousness
and identifies it as idolatry (Col 3:5).
Money is a useful resource, however,
the "love of money" leads a Christian
down a pathway of destruction. (1 Tim.
6:10) We need to therefore be very
careful in remembering the true function
that money plays within our lives.
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?
I. The Meaning of Money
Money and wealth are often confused. This
section of the module provides a very easy way
to separate money from other assets that have
value.
What is money?
What makes the $20 in your pocket
different from your laptop computer or
your cell phone? All three are assets, but
only the $20 will be accepted by the gas
station as payment for your gasoline and
big gulp.
Money is essentially anything that is
easily exchangeable for goods and
services.
What is money?
Of course you could sell your laptop and cell phone,
because they have value, and someone would give you
money in exchange, and then you could buy gasoline
and other items with that money. Or, you could give the
gas station your laptop in exchange for the gasoline in
your car, but then we are talking about barter, the
exchange of goods for goods.
As we will see, using money helps to eliminate the
need for bartering.
Roles of Money
While it seems that everything relies on
money, money really only has three
main roles in any modern economy: it is
a medium of exchange, a store of
value, and a unit of account.
Roles of Money
1. Medium of Exchange
Your employer exchanges dollars for an hour of your labor.
You exchange those dollars for a grocer’s pound of apples.
The grocer exchanges those dollars for an orchard’s apple crop,
and on and on.
Without money, we would make such exchanges in a barter
system.
If I were a cheese maker and I wanted apples, I would need to find
an orchard that also needed cheese, and this would be a
supremely difficult way to do my shopping.
“Double coincidence of wants.”
Roles of Money
2. Store of Value
So long as prices are not rapidly increasing, money is a
decent way to store value. You can put money under your
mattress or in a checking account and it is still useful, with
essentially the same value, a week or a month later.
If I were the town cheese maker, I must quickly find
merchants with whom to exchange my cheese, because if
I wait too long, moldy cheese loses its value.
Roles of Money
3. 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. In the
barter system, all goods are measured in terms
of other goods.
Roles of Money
Prices in a Barter Economy:
A lb of cheese= dozen eggs = ½ lb of
sausage = 3 pints of ale…..
With money, the value of cheese, and all
other goods and services, is measured in
terms of a monetary unit like dollars.
Types of Money
Throughout human history, people have understood the
important roles that money plays, but have chosen to use
different types of money within their societies.
Commodity money: something used as money, normally
gold or silver, that has intrinsic value in other uses.
If you didn’t want to use your gold or silver to purchase a
covered wagon, you could have it melted and shaped into a
piece of jewelry or a serving platter.
Types of Money
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.
This form of money appeared similar to our current paper
currency and was used to make transactions.
However, if you wanted, you could take the paper currency
to a bank and exchange it for an equivalent amount of gold
or silver.
Types of Money
U.S. bill of any denomination:
Is this commodity money? No.
If I take this to the local bank, will they give me the equivalent
amount of gold for this money? No, though it would be funny if
you tried.
Is it money at all? Yes!
Says who? Hmmmm. The government.
If you mow my lawn, and I give you some money for your labor, why
should you accept it? Wouldn’t you rather have something useful like
a block of cheese?
So, what is so useful about this money? I can take it somewhere
and buy something I really want (maybe cheese, maybe not).
Types of Money
What if that store didn’t accept it? Some stores refuse to accept
checks or debit/credit cards.
Now show the class the small print on the front, bottom left,
corner of the bill. It reads “This note is legal tender for all
debts, public and private.”
This is a declaration from the U.S. government that you can use
this money to pay your taxes (a public debt) or buy a slurpee (a
private debt).
Fiat money: money whose value derives entirely from its official
status as a means of exchange.
This is our paper and metal money today. It is our money because
the government has decreed it to be our money. Everyone accepts
it as payment for nearly anything, so it serves the purposes of
money.
Measuring the Money Supply
How much money is out there? It
depends on what we define as money.
The Federal Reserve, our central bank,
has two aggregate measures of the
money supply.
First, we add up the money that is most
easily used to make transactions (the
most liquid).
Measuring the Money Supply
M1 = currency and coin in circulation +
checking deposits + traveler’s checks
Then, the Fed expands the definition to
include “near monies” or forms of money
that can fairly easily be converted to cash
(slightly less liquid than M1). Near monies
pay interest while few items in M1 pay
interest.
Measuring the Money Supply
M2 = M1 + savings accounts + short-term
CDs + money market accounts
(Note: In future modules about monetary
policy, an increase in the money supply is
really just adding to M1 and M2.)