Vocab Words
Money Defined
“Generally accepted” in exchange for goods and services.
What is the narrowest definition of the money supply?
M1
Why does it have to be Physically Durable?
To make sure it is a reliable store of value, and a medium of exchange.
What happens when the money supply increases too quickly?
There is too much money chasing too few goods, pushing up prices.
What's We gauge the value of goods in dollars?
Unit of Account.
Currency Substitution
Use of another country’s currency in private transactions.
What is M1?
Currency + Checkable Deposits.
Why does it have to be Portable?
So it can be easily moved from person to person.
How does inflation occur?
Due to the money supply growing too quickly.
What's Money can lose its store value function. Inflation reduces the “purchasing power” of money?
Store Of Value
Legal Tender
Assets accepted for repayment of debt to the government as well as private transactions.
What is M2?
M1 + Saving deposits, including money market deposit accounts + Small-denominations.
Why does it have to be Divisible?
So it can be broken down to do the transaction.
What happens if the money supply does not grow fast enough?
There is not enough money for transactions to take place.
What's Store of Value?
Enables people to transfer purchasing power from the present to the future.
Dollarization
The situation when market participants use another country’s currency as money.
What are the 2 Components for M1?
Currency (coins and paper money) in the hands of the public.
All checking deposits: All deposits in commercial banks and “thrift”or savings institutions on which deck of any size can be drawn.
Why does it have to be easily standardized?
So prices of two units can be compared.
Why does the Amount of Money matter?
Could be inflation, too little money, or not enough money for transactions to take place.
What's Unit of Account?
Measuring the relative worth of a wide variety of goods, services and resources.
Official Semi-Dollarization
Another country’s currency is the legal tender, but the country also issues its own currency.
What are the Common Monetary Aggregates for M1 and M2?
M1 = The most liquid form of money, including physical currency in circulation and demand deposits (checkable deposits).
M2 = M1 plus less liquid assets, such as savings deposits, small time deposits, and certain money market funds.
True or False
Commodity Money has some other use other than being a medium of exchange, and being a unit of account, and having store of value.
True
How could the economy could slide into a recession, or even worse, a depression?
If there is too little money.
What's Medium of Exchange?
Usable for buying and selling goods and services.