HAGAD, ANGELICA C.

BSBA 2-B
Study Guide 4

The Future and How to Measure Money

Learning Activity 1: Individual Activity

a. What are the possible changes in money and its functions?

Money is something that people use every day. We earn it and spend it but don't often think
much about it. Economists define money as any good that is widely accepted as final payment
for goods and services

 First: Money is a store of value. If I work today and earn 25 dollars, I can hold on to the
money before I spend it because it will hold its value until tomorrow, next week, or even
next year. In fact, holding money is a more effective way of storing value than holding
other items of value such as corn, which might rot. Although it is an efficient store of
value, money is not a perfect store of value. Inflation slowly erodes the purchasing
power of money over time.

 Second: Money is a unit of account. You can think of money as a yardstick-the device we
use to measure value in economic transactions.

 Third: Money is a medium of exchange. This means that money is widely accepted as a
method of payment. When I go to the grocery store, I am confident that the cashier will
accept my payment of money.
b. How technology influence the financial system?
The increasingly fast pace of today’s business world means business needs are constantly
changing, and traditional banking model are struggling to keep up. In order to remain
competitive, banks must respond to customer’s changing needs. In order to improve customer
experience and to expand service offerings, the solution are to leverage the latest information
technology.
Today, in the world of electronic securities trading, it is the speed of transactions that largely
separates profits from losses. This is where electronic trading and high-frequency trading (HFT)
comes into play. High-Frequency trading is based on mathematical algorithms to execute
transactions a thousand times faster than traditional methods.
c. How to measure money?
We defined money as anything that is generally accepted as a means of payment, is a store of
value, can be used as a unit of account or a standard of deferred payment. What exactly is
included?
Cash in your pocket certainly serves as money. But what about checks or credit cards? Are they
money, too? Rather than trying to state a single way of measuring money, economists offer
broader definitions of money based on the concept of liquidity. Liquidity refers to how quickly
an asset can be used to buy a good or service.

Economists generally use two definitions of the supply of money: M1 and M2. M1 includes
those assets that are the most liquid such as cash, checkable (demand) deposits, and traveler’s
 checks. M2 includes M1 plus some less liquid (but still fairly liquid) assets, including savings and
time deposits, certificates of deposit, and money market funds.

 M1

M1 is the most narrow definition of the money supply. It includes coins and currency in circulation—in
other words they are not held held by the U.S. Treasury, or the Federal Reserve Bank, but circulate in
the economy.

 M2

A broader definition of money, M2 includes everything in M1 but also adds other types of deposits. For
example, M2 includes savings deposits in banks, which are bank accounts on which you cannot write a
check directly, but from which you can easily withdraw the money at an automatic teller machine or
bank.

d. What is the effect of inflation to economy and to the people?

What are the two main impacts of inflation?
Inflation raises prices, lowering your purchasing power. Inflation also lowers the values of
pensions, savings, and Treasury notes. Assets such as real estate and collectibles usually keep up
with inflation and high inflation is generally considered harmful, some economists believe that a
small amount of inflation can help drive economic growth. So meaning an increase in the
general level of prices implies a decrease in the purchasing power of the currency. The effect of
inflation is not distributed evenly in the economy, and as a consequence there are hidden costs
to some and benefits to others from this decrease in the purchasing power of money.

Topic: MONEY

Schemas To understand the usefulness of money, we must consider what the world
would be like without money. How would people exchange goods and
services?
 Money serves several functions in a medium of exchange, a unit of account, a
store of value, and a standard of deferred payment. There are two types of
money: commodity money, which is an item used as money, but which also
has value from its use as something other than money; and fiat money, which
has no intrinsic value, but is declared by a government to be the legal tender
of a country.
New Learnings Money is what people in a society regularly use when purchasing or selling
goods and services. If money were not available, people would need to barter
with each other, meaning that each person would need to identify others with
whom they have a double coincidence of wants—that is, each party has a
specific good or service that the other desires.
Misconceptions