M0, M1, M2

1. M0, M1, M2 Mrs. Eskra

2. OBJECTIVES:What will you learn? • Money is anything that serves as a medium of exchange, store of value, and unit of account. • We can classify money according to how liquid it is. • M0 • M1 • M2 • The FOMC is the organization in the U.S. who manages and makes decisions about the supply of money.

3. Three Functions of Money Money is anything that serves as: • A Medium of Exchange • A Store of Value • A Unit of Account

4. What is Money? Most people probably tend to think of bills and coins when they hear the word “money.” If money is anything that allows to get what we want, isn’t it also checks and debit cards? What else is it?

5. What is Money? • Depending on how easy or difficult it is to spend a certain type of money, we can classify it accordingly. Some forms of money, like cash, are very easy to go out and spend right now. Others, like money in our savings count, involve a few more steps to be able to spend. This is known as liquidity.

6. M0 The narrowest definition of money, includes only the stock of physical currency.

7. M0 • As the narrowest way of defining what money is, this is simply all actual cash held by people. • Almost everyone accepts cash as a form of payment. I don’t know about you, but I very rarely have much cash on me! Needed cash to pay my neighbor for Girl Scout cookies.

8. M1 Includes demand deposits (checking account balances) + M0 (stock of physical currency).

9. M1 • If we include money that we can very easily spend, then M1 will include our checking accounts. You can swipe your debit card almost everywhere now and immediately purchase something. I could not use a debit card to buy Girl Scout Cookies but I probably could have written her a check.

10. M2 Time deposits + M1 (demand deposits + stock of physical currency).

11. M2 • This is the broadest definition of money. • This includes the ways that you are holding money that you cannot immediately pay for something. • Savings accounts • Money market mutual funds After Christmas, I needed to transfer some money from savings into checking to pay my credit card bills. This involved additional steps, so this money is not as “liquid.”

12. FOMC • Our FOMC (Federal Open Market Committee) – is part of the Fed and meets several times a year to manage our nation’s money supply. • The tools they use to control our M0, M1, and M2 are: • The reserve requirement • Open market operations • Fed funds market • Discount rate

13. RECAP:What did you learn? • Money is anything that serves as a medium of exchange, store of value, and unit of account. • We can classify money according to how liquid it is. • M0 • M1 • M2 • The FOMC is the organization in the U.S. who manages and makes decisions about the supply of money.