I know the four functions of money Checklist for Exam 7 I know the difference between commodity money and fiat money o In class we mainly focused on three functions of money because frankly 2 of them are essentially the same thing and most people don t really worry about the fourth one The four functions of money are This function of money means that we can use something money in Medium of Exchange Unit of Account Money is a standardized measurement of the market value of some good The function means that we can rely on money to retain its value over time order to purchases goods and services Being able to use money as a medium of exchange avoids some certain problems with the barter system such as the double coincidence of wants that we discussed in class DCoW is a part of the barter system where in order to make a transaction both parties needed to want something from the other Obviously this is why we have 1 bills 5 bills 10 bills etc Store of Value and that we can easily retrieve older money and still have it worth what it was previously retain its value over time The only thing that threatens the store of value function is inflation which is one of the reasons why we try to keep inflation at healthy levels Standard of Deferred Payments holds value over time has a set value assigned to it ex 1 and can be used to make transactions for goods and services we can use money in order to pay off debts that we have accumulated over time Because this seems like such an obvious and commonsense function this function is often lumped in with the other three functions of money in more modern textbooks so it is confusing as to why we want to know it but Dr Becker is the man in charge so I will not question is methods This function of money just means that since we know money o Commodity money was the first type of money that developed in society Commodity money is a form of money that has some sort of intrinsic value that is it can be used for something other than just being used for transactions for other goods or services The examples we used in class and discussion of commodity money were salt cattle and gold Salt could be used to cure and season food and meat as well as used in transactions cattle could be used for meat cheese milk etc as well as used in transactions and gold could be used to make pieces of jewelry or artwork or in transactions o Fiat money is money that was developed as societies developed and transactions became more complicated Fiat money is a form of money with no intrinsic value meaning that the only thing that fiat money can be used for is the four functions listed above o Both M1 and M2 are measurements of the money supply in the United States there are 8 different measures but both of these two are the most popular measurements of the money supply M1 is the most basic and common measurement of the money supply in the United States It is Demand Deposits These are most forms of checking accounts which are accounts that allow The value of all currency cash and coins consumers to easily access their money but because of this ease of access and high level of liquidity they do not pay interest on money in the accounts Traveler s Checks accepts because the face value of what is being purchased is guaranteed to be paid by the issuer of the check These are checks that most merchants internationally and domestically I know the definition of M1 Other Checking These are also known as a Negotiable Order of Withdrawal or NOW accounts These accounts are demand deposit accounts that allow you to write an unlimited amount of checks from the account AND it pays interest in the money in the account which is what differentiates is from the normal demand deposits I know the definition of M2 Money Market Accounts o The M2 measurement of the money supply includes Everything that is included in M1 Savings accounts I think we all know what these are but just in case savings accounts are bank accounts that pay you interest on the money you hold in this account There are often limits on how often and how much you can take from these accounts which is why these pay interest on the money in the account because they are using that money to make loans so the bank is depending on the consumer keeping that money in the account for a while These are a sort of mix between savings accounts and money market mutual funds These funds are held by commercial banks but have high minimum balances that must be kept in the account for a but they also pay a higher interest rate than savings accounts in order to stay competitive with money market mutual funds These accounts are also considered extremely low in risk the money in low risk mutual funds These are also considered extremely low risk as well Certificates of Deposit CD that are less than 100 000 certain minimum balance and must be held with the bank for a specified period of time Because it is extremely difficult for the consumer to access these funds CDs pay very good interest rates Also CDs are relatively risk free because they are insured by the FDIC like savings accounts These are fund held by professional investment firms then invest CDs are accounts that have to have a Money market mutual funds I can explain how the banking system creates money using the fractional reserve system o As we have discussed in class certain regulations require the banks to keep a certain percentage of deposits that consumers keep with them in reserves The amount that the banks are required to keep is what is known as the required reserve ratio also known as rrr DO NOT confuse this with r 3 After the banks keep in reserves what they are legally required to they then give the rest of the money out to consumers in the form of loans The consumers that have received these loans then deposit the loans into a bank which must once again keep a certain percentage of that deposited money in reserved as required by regulations The cycle then continues until there is nothing else to be loaned out So if a bank gets 100 in deposits and rrr 10 the bank will keep 10 in reserves and loan out 90 That 90 is then deposited into an account where 9 is kept in reserves while 81 is loaned out and so on until there is nothing left over after reserve requirements I can calculate the simple money multiplier from the required reserve ratio o This is an extremely simple equation we simply take the monetary base MB which is just currency and coins and Federal reserve deposits and divide it