Activity 35

What’s all this about

the MS?
• 1. What are the three
basic functions of
money?
• 1. What are the three • Medium of exchange
basic functions of – Accepted as payment for
money? 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
• 2. Why is it important • Changes in the size
for the FED to know of the money supply
the size and rate of and the rate in which
growth of the money it is growing can have
supply? significant impact on
fluctuations of output
and the health or well
being of an economy.
• Uncertainty creates
difficult decision
making for firms
• 2(A). What are the
effects if the money
supply grows too
slowly?
• 2(A). What are the effects • If the money supply is
if the money supply growing too slowly, the
grows too slowly? 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
• 2(B). What are the
effects if the money
supply grows too
rapidly?
• 2(B). What are the • If the money supply is
effects if the money growing too quickly,
supply grows too • it could lead to
rapidly? inflation
• 3. Name a type of
money we use that
serves primarily as a
medium of exchange.
• 3. Name a type of • Currency
money we use that • Coins
serves primarily as a • Debit cards
medium of exchange.
• Checkable deposits
• 4. Name a type of
money we use that
serves primarily as a
store of value.
• 4. Name a type of • Savings account
money we use that • Money market mutual
serves primarily as a fund account
store of value. – IMMA
• 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?
• 5. As the use of credit • A credit card differs from
cards became more a loan in that it’s use is a
prominent and the promise to pay.
availability of credit – An issuer makes a
broader than ever, why payment on behalf of the
are credit cards not user, but then the user
included in the MS? 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.
• 6. Why is it difficult for
the FED to get an
accurate measure of
the money supply
(MS)?
• 6. Why is it difficult for the • Because of the volume of
FED to get an accurate transactions in the US,
measure of the money – which can range into the
supply (MS)? 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
• 7. Why must the FED
continue to develop
new ways to track the
money supply (MS)?
• 7. Why must the FED • Because of technological
continue to develop new innovation in the financial
ways to track the money services industry,
supply (MS)? • 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.
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 • M1= _______________
accounts, ATM and credit
union share draft accounts
• Currency • M2= _______________
• Large time deposits
• Non-checkable savings • M3= _______________
deposits
• Small time deposits
• Institutional money
market mutual funds
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 • M1= 850+200=1,050
accounts, ATM and credit
union share draft accounts • M2= 1,050+1,745+302=3,097
• Currency
• Large time deposits • M3= 3,097+800+1,210=5,107
• Non-checkable savings
deposits
• Small time deposits
• Institutional money
market mutual funds
Components of M1
M2 over 10 years
M2 since 2007
Change from a year ago
% change since 1963
% change since 2006