Money defined
When its generally accepted.
When exchanging goods or services.
Medium of exchange
any asset widely accepted as a means of payment for goods and services. This function of money facilitates trade by eliminating the need for a barter economy, where goods are directly traded for other goods. In modern economies, money can be physical (like cash) or electronic, and it functions because society generally recognizes its value and utility for future transactions.
Durability
It must be able to withstand wear and tear. Paper bills and metal coins are made to be durable, unlike a perishable commodity.
Why is money essential for survival?
Money is a medium of exchange that allows people to acquire basic needs like food, water, clothing, and shelter.
What are the main components of M1.
Consider what forms of money are readily available for spending and what makes them "liquid".
Are currencies considered money all the time? True or false.
False.
Unit of account
Money acts as a common standard for measuring the value of goods and services. This allows for the meaningful comparison of the value of different items, which helps people make more informed economic decisions.
Portability
It must be easy to carry. Currency is light and convenient to transport, unlike livestock or heavy materials.
How does money provide a sense of security and freedom?
Financial stability allows people to prepare for unexpected events, such as medical emergencies or job loss, and gives them the freedom to make choices about their lives.
How does the M2 money supply differ from M1
Focus on the additional assets that are less liquid than M1 and how they are classified.
Currency substitution.
Use of another country currency in private transactions.
Store of value
Money allows you to hold wealth and use it in the future without it losing a significant portion of its value. While inflation can diminish money's purchasing power over time, it remains a far more reliable store of value than perishable goods.
Divisibility
It must be easy to carry. Currency is light and convenient to transport, unlike livestock or heavy materials.
What role does money play in achieving personal goals and opportunities?
Money can provide access to higher education, start a business, or pursue hobbies and interests that improve a person's quality of life.
Why are credit cards excluded from both M1 and M2, even though they are widely used for purchases?
Think about the nature of credit cards in relation to actual money and borrowing.
Legal tender
Assets accepted for payment of debt to the government as well as private transactions.
Standard of deferred payment
This function enables people to make purchases now and pay for them later. Loans and other future agreements are stated in monetary terms, making borrowing and lending a more straightforward process
Limited supply
The supply of money must be limited to maintain its value and prevent inflation.
Can money buy happiness?
While money itself doesn't guarantee happiness, having enough to cover expenses and reduce financial stress can significantly contribute to a person's overall well-being and peace of mind.
If you move money from your savings account to your checking account, how does this action affect the M1 and M2 money supplies?
Consider the definition of M1 and M2 and how each component changes when money shifts between these account types.
Dollarization
The situation when market participants use another country's currency as money.
Uniformity
Each unit of the currency must be the same as any other unit. All $20 bills have the same value and are uniform in appearance, which is not true of cows.
Acceptability
People must have confidence that the money will be accepted as a medium of exchange. Government legal tender laws help ensure widespread acceptance.
How does money enable people to contribute to their communities?
Beyond personal use, money can be used for philanthropy, charity, and investment in businesses, which contributes to economic growth and development within society.
What is the general relationship between the sizes of the M1 and M2 money supplies, and why does this relationship exist?
Compare the definitions of M1 and M2, with M2 encompassing M1, and consider the implications for their overall size.