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AP Macroeconomics

AP Macroeconomics. Money: Definitions, Characteristics, and Measures of. Money Defined. Money is anything that can be used as: A medium of exchange (a way to get what you want) A store of value (a way to preserve wealth) A unit of account / Standard of Value (compare prices).

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AP Macroeconomics

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  1. AP Macroeconomics Money: Definitions, Characteristics, and Measures of

  2. Money Defined • Money is anything that can be used as: • A medium of exchange (a way to get what you want) • A store of value (a way to preserve wealth) • A unit of account / Standard of Value (compare prices)

  3. Characteristics of Money • Money works best when it meets these criteria: • Portable • Durable • Divisible • Acceptable • Stable

  4. Money Facts: • What backs the dollar and makes it valuable? • Gold? • NO! The dollar is legal tender because the government says it’s money and people willingly accept it. The Dollar is backed by FAITH. • This is referred to as an inconvertible fiat standard.

  5. The Supply of Money • In the United States, the Federal Reserve System is the sole issuer of currency. • This means the Fed has monopoly control over the money supply. • There are two important measures of the Money Supply today. • M1(narrowest definition) • M2 (includes M1)

  6. M1 • M1 serves primarily as a medium of exchange. It includes: • Currency and Coin • Checking accounts • Both are very liquid

  7. M2 • M2 serves as a store of value. It includes: • The M1+ • Saving Accounts+ • Time Deposits+ • Money Market+ Mutual Funds Certificates of Deposit Savings Accounts

  8. M1 & M2 • As we go from M1 to M2 • The measure becomeslarger • Money becomes less liquid • As we go from M2 to M1 • Themeasurebecomes smaller • Money becomesmoreliquid

  9. Summary • M1=currency + checkable deposits • M2=savings accounts, time deposits, money market mutual funds PLUS M1. • Which will always be greater, M1 or M2? • That’s right, M2 • What does liquidity mean? • How quick an asset can be converted into cash • Which is more liquid, M1 or M2? • That’s right, M1. M1 includes CASH and checkable deposits.

  10. Time Value of Money • Is a dollar today worth more than a dollar tomorrow? • YES • Why? • Opportunity cost & Inflation • This is the reason for charging and paying interest ???

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