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AP Economics

AP Economics. Chapter 13 Notes. I. Three Functions of Money. A. Meduim of Exchange > to buy and sell goods & services. B. Unit of Account > Standard for measuring relative worth. C. Store of Value > liquid asset that can be stored/saved.

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AP Economics

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  1. AP Economics Chapter 13 Notes

  2. I. Three Functions of Money • A. Meduim of Exchange > to buy and sell goods & services. • B. Unit of Account > Standard for measuring relative worth. • C. Store of Value > liquid asset that can be stored/saved.

  3. D. Categories of assets/$:1. Time Deposits = like a savings account. Must leave in bank for specific time 2. Checkable deposits = money in checking 3. money market mutual funds = money invested in a pool with others. Invested in c.d.s and bonds. Invested through MF company. 4, money market deposit accounts = same as above, but through a bank 5. Bonds = lending money to gov 6. stocks = you buy ownership in a company 7. stock mutual funds = same as #3, but invests in stocks 8. cash 9. savings

  4. II. Supply of Money A. M1 > instant money = cash, atm card, checks B. Near Money > M2 (incorporates M1) 1. Ex. Savings, Money Market, C.D., Mutual Fund, stocks,bonds small time deposits C. M3 > large time deposits of 100k or more D. For our purpose, we will use M1 as our definition of the Money Supply.

  5. III. What “backs” the Money Supply? • A. Money as Debt > currency (M1)cannot be redeemed for gold or anything else. They are a debt of the gov. (currency) and banks (checks). • B. 3 reasons why money is given value: 1. Accepted > is accepted by public as exchangeable. 2. Legal Tender > required by gov. as a payment by law.

  6. 3. Scarcity > scarcity of money relative to goods & services. Keeps it valuable. • C. Money & Prices 1. increased prices = decreased value of dollar (inflation) 2. Hyper Inflation > may make money worthless or unacceptable to the public. 3. Gov. controls money supply by balancing contraction & expansion of money.

  7. IV. The Demand for Money (2 components) • A. Wealth/ Money is held by the public for 2 reasons: 1. Transaction Demand (Dt) > 2. Asset Demand (Da) > 3. Total Demand for money (Dm=Da+Dt)

  8. V. Money Market • A. Combining D & S for money in the money market will enable us to determine equil. rate of interest. 1. If S is increased & D is decreased, people reduce money holdings & buy bonds, which will go up in price. Interest rate will go down. (and vice versa)

  9. 2. Value of $ a. Price Index rises from 100 to 140. What has happened to value of $? i. 100/140 = 71.4 ii. 100-71.4 = decreased by 28.6% 3. Bonds > Price = 1000. Paym = 300 Int.= 300/1000 = 30%

  10. VI. The “Fed” & the Banking System • A. Functions of the Federal Reserve (The “Fed”) 1. MAJOR FUNCTION: sets money policy & control of M Supply. a. Controls interest rates b. Set reserve requirements of banks c. buys and sells bonds

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