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Activity 35 Whats all this about the MS?. 1. What are the three basic functions of money?

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Presentation on theme: "Activity 35 Whats all this about the MS?. 1. What are the three basic functions of money?"— Presentation transcript:

1 Activity 35 Whats all this about the MS?

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

3 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 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 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 Currency Coins Debit cards Checkable deposits

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

12 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 A credit card differs from a loan in that its 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, –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 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 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 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


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