Chapter 13 "Money and banks", after reading this chapter, you should be able to: Detail what the features of “money” are, specify what is included in the “money supply”, describe how a bank creates money, explain how the money multiplier works, discuss why the money supply is important. | Chapter 13 Money and Banks The Uses of Money Money replaced barter and that greatly simplified market transactions. Barter is the direct exchange of one good for another, without the use of money. 13- Primitive economies had to resort to barter, a very inefficient method of trade. Barter first requires you to “want what the other person has” and the other person to “want what you have.” Once that is established, then the arguing about the terms of trade (how much of one for the other) begins. Anything that serves all of the following purposes can be thought of as money: Medium of exchange: accepted as payment for goods and services (and debts). Store of value: can be held for future purchases. Standard of value: serves as a yardstick for measuring the prices of goods and services. The Functions of Money 13- There are three functions of money. Many things can serve as one of these functions, but that does not make it “money.” At best, it is a partial substitute for money. A credit card is a good example: it serves only as a medium of exchange. Basic Money Supply The basic money supply is typically referred to by the abbreviation M1. M1 is currency held by the public, plus balances in transactions accounts. Cash is only part of the money supply; most money consists of balances in transactions accounts. 13- There are other measures of the money supply, for example, M2 and M3. Money supply is the amount of money we, the public, MUST hold as cash or in transaction accounts. We have individual methods of handling this: If you hold too much cash, you can put it in a savings account (M2). However, the bank will lend it out to someone who wants money to spend. Note that drawing cash out of your checking account does not change the amount of M1. Figure 13- Near Money There are additional measures of the money supply (M2, M3, etc.). Savings accounts. Certificates of deposit (CDs). Money-market mutual funds. We will limit our discussion to M1, | Chapter 13 Money and Banks The Uses of Money Money replaced barter and that greatly simplified market transactions. Barter is the direct exchange of one good for another, without the use of money. 13- Primitive economies had to resort to barter, a very inefficient method of trade. Barter first requires you to “want what the other person has” and the other person to “want what you have.” Once that is established, then the arguing about the terms of trade (how much of one for the other) begins. Anything that serves all of the following purposes can be thought of as money: Medium of exchange: accepted as payment for goods and services (and debts). Store of value: can be held for future purchases. Standard of value: serves as a yardstick for measuring the prices of goods and services. The Functions of Money 13- There are three functions of money. Many things can serve as one of these functions, but that does not make it “money.” At best, it is a partial substitute for .
