ap economics: module 23 terms

money

money

any asset that can easily be used to purchase g/s

• durable, portable, uniform, in limited supply, able to be divided into smaller units

• consists of cash + highly liquid assets

• eliminates bartering

does a bank account count as money?

yes

currency in circulation

a type of money; actual cash in the public’s hands

checkable bank deposits

a type of money; where people can write checks and debit funds

money supply

total value of financial assets in the economy that are considered money

narrow definition of money supply

called the M1 money supply

• includes only the most liquid assets (most liquid monetary aggregate)

• currency in circulation, traveler’s checks, checkable bank deposits, savings accounts

broad definition of money supply

called the M2 money supply

• M1 + assets that are almost checkable (near-moneys)

• M1 + certificates of deposits (CDs), money market funds

“double coincidence of wants”

problem where 2 parties can only trade when they want what the other has to offer

• money solves this as a medium of exchange (increased welfare due to more trade)

3 roles of money

medium of exchange, store of value, unit of account

medium of exchange

an asset that individuals acquire for the purpose of trading for g/s rather than for their own consumption

• eliminates bartering

store of value

has a means of holding purchasing power over time

• a necessary, but not distinctive feature of money

• applies when prices aren’t rapidly changing (inflation)

unit of account

relative worth; a measure used to set prices and make economic calculations

• easier terms of transaction —> more gains from trade

commodity money

a good that is used as a medium of exchange that has intrinsic value in other uses (more than 1 role)

commodity-backed money

a medium of exchange with no intrinsic value whose ultimate value is guaranteed by a promise that it can be converted into valuable goods

• ties up less valuable resources

• ex: silver, gold

fiat money

a medium of exchange whose value derives entirely from its official status as a means of payment; no intrinsic value

• exists by government fiat

• ex: paper currency

fiat

policy declared by a ruler

advantages of fiat money

• doesn’t tie up real resources that could be used in other ways (waggon-way through the air)

• money supply can be managed by the economy’s needs, not by how much gold/silver we have

risks of fiat money

• counterfeiting

• temptation to abuse the government’s privilege to print money (can cause inflation)

monetary aggregate

overall measure of the money supply

• 2 types: M1 and M2

near-moneys

financial assets that aren’t directly usable as a medium of exchange, but can be readily converted to cash or checkable bank deposits

money market funds

mutual funds that only invest in liquid assets and bear a close resemblance to bank deposits