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Understanding Money: Its Definition and Historical Context

Explore the concept of money through our video tutorial, "What Is Money?" In Episode #29 of our Macroeconomics series, we delve into the history and evolution of money, its functions, and its significance in the economy. Join us to enhance your understanding of this vital topic!

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Understanding Money: Its Definition and Historical Context

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  1. DO NOW: In 50 words or less, what is MONEY?
  2. THE HISTORY OF MONEY
  3. Video Tutorial: ECON LINKS PAGE - VIDEO TUTORIALS…Scroll down to MACROECONOMICS - Episode #29: What Is Money (4:28) EPISODE #29: WHAT IS MONEY?

  4. MONEY…

    …is an object or thing which is accepted as a payment for goods or to settle debts
  5. FUNTIONS of MONEY: MEDIUM OF EXCHANGE UNIT OF ACCOUNT (measure of value) STORE OF VALUE
  6. 5 characteristics of money: Generally acceptable Durable (for use in multiple transactions) Portable (easy to carry and use) Divisible (bills & coins of graduated amounts) Scarce
  7. BARTER! Trade of goods for other goods Inefficient because it requires a DOUBLE COINCIDENCE OF WANTS (You gotta’ have exactly what I want, and I gotta’ have exactly what you want MONEY replaces barter as a means of acquiring goods
  8. KINDS of MONEY: COMMODITY MONEY : gets its value from what it’s made from a usable good with INTRINSIC value precious metals like gold, silver cigarettes or chocolate bars in WWII FIAT MONEY: gets its value from a legal decree little or NO intrinsic or useful value on its own
  9. THE MONEY SUPPLY Is the stock of liquid assets in a given economy, which can be exchanged for goods and services It is NOT merely the amount of CURRENCY! LIQUIDITY: is how easily an asset can be converted into currency CURRENCY: money in the form of paper or coins PAPER MONEY can be backed by Commodity Fiat
  10. CURRNECY money in the form of paper or coins can be backed by Commodity Fiat
  11. Other forms besides currency: DEMAND DEPOSITS: stored in a bank account can be withdrawn at any time upon demand Also called CHECKABLE DEPOSITS TIME DEPOSITS: stored in accounts at banks, but… cannot be withdrawn on demand without a substantial penalty Ex.: CD – certificate of deposit – 6 mo., 1 yr., etc. MONEY MARKET ACCOUNTS: stricter rules than DEMAND, but… looser rules than TIME DEPOSITS
  12. THE MONEY SUPPLY: M1: extremely LIQUID Currency Traveler’s checks Demand Deposits M2: broader and less liquid M1 PLUS Money in SAVINGS ACCOUNTS & shorter TIME DEPOSITS (money market accounts) M3: M1 and M2 + more ILLIQUID forms (long time deposits) L: broadest definition – M1, M2, M3, and commercial papers and deeds
  13. The Equation of Exchange: MV = PQ M= the stock of money (how much) V=the velocity of money (how often it turns over or changes hands) Q=is the output of goods and services (quantity) P=is the average current price
  14. FRACTIONAL RESERVE BANKING: How banks MAKE money (a profit): YOU deposit your money at interest THEY lend it out or invest it at interest The banks PAY you and keep the difference! How banks CREATE money (increase the money supply): through FRACTIONAL RESERVE BANKING
  15. Video Tutorials : Creating Money with Fractional Reserve Banking ECON LINKS PAGE - VIDEO TUTORIALS…Scroll down and choose MACROECONOMICS: EPISODE #30: Creating Money  (3:55) EPISODE #30: Creating Money (3:55) ECONOMICS USA SERIES– VIDEO ON DEMAND Program #20: The Banking System(30:00)
  16. THE RESERVE REQUIREMENT: The % of DEMAND deposits which a bank has to keep on hand in the vault to cover withdrawals Rate is set by the FEDERAL RESERVE BOARD
  17. What BANKS do when they can’t cover all the day’s demands: BORROW: From the FEDERAL RESERVE BANK The DISCOUNT RATE: the interest rate which the Fed charges banks for loans BORROW: From OTHER BANKS The FEDERAL FUNDS RATE: the interest rate which banks charge banks
  18. Gresham’s Law Sir Thomas Gresham bad money drives good money out of circulation. THEN…It was about DEBASEMENT the reduction of a coin’s precious metal content. Because non-debased coins, or ‘‘good money,’’ were more valuable, people hoarded these coins and spent the debased ‘‘bad money.’’ NOW…It’s about INFLATION
  19. CARDS UP! Quiz Money Fractional Reserve Banking
  20. 1. The direct exchange of goods for other goods is known as a. commerce b. barter c. finance d. retail e. wholesale
  21. 2. Money in the bank serves as a(n) a. unit of account b. medium of exchange c. commodity d. unit of value e. store of value
  22. 3. Money used to buy clothing serves as a(n) a. unit of value b. commodity c. store of value d. unit of account e. medium of exchange
  23. 4. The fact that I can spend a hundred dollar bill and receive a twenty, a ten, three ones, and forty-nine cents change illustrates which characteristic of money? a. scarcity b. acceptability c. durability d. divisibility e. portability
  24. 5. The ease with which an asset can be converted into the economy's medium of exchange is referred to as its a. transferability b. exchangeability c. liquidity d. acceptability e. durability
  25. 6. Which of the following forms of money is the most liquid? a. time deposits b. money market accounts c. traveler’s checks d. currency e. demand deposits
  26. 7. Which function of money makes prices possible? a. unit of account b. medium of exchange c. scarcity d. store of value e. divisibility
  27. 8. Which function of money does inflation most undermine? a. scarcity b. unit of account c. medium of exchange d. store of value e. divisibility
  28. 9. Money must be able to be used over and over again without wearing out. This represents which characteristic of money? a. durability b. acceptability c. divisibility d. portability e. scarcity
  29. 10. Money with intrinsic value is called a. fiat money b. commodity money c. local money d. legal money e. bullion money
  30. 11. Which of the following is an example of fiat money? a. Hershey bars b. gold c. yen d. cotton e. cigarettes
  31. 12. Money facilitates trade by removing the need for a. voluntary exchange b. a double coincidence of wants c. property rights d. supply and demand e. markets
  32. 13. Devaluing coins by reducing the amount of precious metal in them and substituting base metals a. voluntary exchange b. a double coincidence of wants c. debasement d. hyperinflation e. liquidity
  33. 14. If the reserve ratio is 10%, a bank with deposits of $1000 can loan out a. $10 b. $100 c. $90 d. $900 e. $990
  34. 15. If the reserve ratio is 20%, the money multiplier is a. 2 b. 50 c. 5 d. 20 e. 10
  35. 16. If the reserve ratio is 5%, how much money will be created in the economy by a deposit of $100? a. $100 b. $4000 c. $2000 d. $1000 e. $500
  36. 17. The equation of exchange is a. MQ = PV b. MVP = Q c. M = VPQ d. MP = VQ e. MV = PQ
  37. 18. How often money circulates through the economy; in other words, how many times a dollar bill is spent in a given time period: a. velocity b. portability c. durability d. divisibility e. scarcity
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