1. What’s all this about the MS?
Activity 35
What’s all this about
the MS?

2. 1. What are the three basic functions of money?

3. 1. What are the three basic functions of money? Medium of exchange
Accepted as payment for goods and services
Standard of value
Unit of account
A price mechanism
to compare the value of goods and services
Store of value
Able to be held for future purchases
An abode of purchasing power

4. 2. Why is it important for the FED to know the size and rate of growth of the money supply?
Changes in the size of the money supply and the rate in which it is growing can have significant impact on fluctuations of output and the health or well being of an economy.
Uncertainty creates difficult decision making for firms

5. 2(A). What are the effects if the money supply grows too slowly?

6. 2(A). What are the effects if the money supply grows too slowly?
If the money supply is growing too slowly, the likelihood of recession increases
The demand for money will increase
Driving up interest rates
As interest rates rise, investment declines
Slowing the growth rate of real output

7. 2(B). What are the effects if the money supply grows too rapidly?

8. 2(B). What are the effects if the money supply grows too rapidly?
If the money supply is growing too quickly,
it could lead to inflation

9. 3. Name a type of money we use that serves primarily as a medium of exchange.

10. 3. Name a type of money we use that serves primarily as a medium of exchange.
Currency
Coins
Debit cards
Checkable deposits

11. 4. Name a type of money we use that serves primarily as a store of value.

12. Money market mutual fund account
4. Name a type of money we use that serves primarily as a store of value.
Savings account
Money market mutual fund account
IMMA

13. 5. As the use of credit cards became more prominent and the availability of credit broader than ever, why are credit cards not included in the MS?

14. 5. As the use of credit cards became more prominent and the availability of credit broader than ever, why are credit cards not included in the MS?
A credit card differs from a loan in that it’s use is a promise to pay.
An issuer makes a payment on behalf of the user, but then the user must make payment to the issuer.
If loans and credit card use were counted as money, one economic transaction would be double-counted in the money supply.

15. 6. Why is it difficult for the FED to get an accurate measure of the money supply (MS)?

16. Because of the volume of transactions in the US,
6. Why is it difficult for the FED to get an accurate measure of the money supply (MS)?
Because of the volume of transactions in the US,
which can range into the trillions on a daily basis,
getting an accurate measure of each transaction can be an arduous task.
The inputs are constantly changing
as banks make new loans
and people repay loans ahead of schedule

17. 7. Why must the FED continue to develop new ways to track the money supply (MS)?

18. 7. Why must the FED continue to develop new ways to track the money supply (MS)?
Because of technological innovation in the financial services industry,
and profit maximizing behavior on the part of commercial banks,
the FED must find new ways for tracking the money supply to assist with monetary policy.

19. Non-checkable savings deposits Small time deposits
8. Use the data to calculate M1, M2, and M3. Assume all items not mentioned are zero. Show all your work.
Checkable deposits
Demand deposits, NOW accounts, ATM and credit union share draft accounts
Currency
Large time deposits
Non-checkable savings deposits
Small time deposits
Institutional money market mutual funds
M1= _______________
M2= _______________
M3= _______________

20. Non-checkable savings deposits Small time deposits
8. Use the data to calculate M1, M2, and M3. Assume all items not mentioned are zero. Show all your work.
Checkable deposits
Demand deposits, NOW accounts, ATM and credit union share draft accounts
Currency
Large time deposits
Non-checkable savings deposits
Small time deposits
Institutional money market mutual funds
M1= =1,050
M2= 1,050+1, =3,097
M3= 3, ,210=5,107

21. Components of M1

22. M2 over 10 years

23. M2 since 2007

24. Change from a year ago

25. % change since 1963

26. % change since 2006