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Macroeconomics Module 5

Chips used in casinos can serve as money within the casino's walls by functioning as a medium of exchange, unit of account, and store of value. However, chips lose their value as money once removed from the casino. Physical goods like houses, land, art, coins, and stamps can serve as stores of value but not as mediums of exchange. Currency and checks in M1 are easiest to spend at stores, while converting M2 funds from savings requires using an ATM first.

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Jonnel Gadingan
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109 views

Macroeconomics Module 5

Chips used in casinos can serve as money within the casino's walls by functioning as a medium of exchange, unit of account, and store of value. However, chips lose their value as money once removed from the casino. Physical goods like houses, land, art, coins, and stamps can serve as stores of value but not as mediums of exchange. Currency and checks in M1 are easiest to spend at stores, while converting M2 funds from savings requires using an ATM first.

Uploaded by

Jonnel Gadingan
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Jinny Rose C.

Rado BSED – SOCIAL STUDIES 2


Negros Oriental State University – Siaton Campus
MODULE 5
1. In many casinos, a person buys chips to use for gambling.
Within the casino walls, customers often can use these chips to
buy food and drink or even a hotel room. Do chips in a gambling
casino serve all three functions of money?
If the chips are kept within the casino's borders, they will perform all
three purposes of money: medium of trade, unit of account, and store of
value. Chips can be used as a means of exchange by both the buyer and
seller. As long as you stay within the confines of the casino, chips are
money; they serve as a means of transaction, a unit of account, and a
store of value. Chips aren't very useful as money once you leave the
casino, but many other types of money aren't either. It is difficult, for
example, to spend money from Turkey or Brazil at your local grocery
or movie theater.
2. Can you name some item that is a store of value, but does not
serve the other functions of money?
Many physical goods that a person purchases but later sells can serve
as an answer to this issue. A house, land, art, rare coins or stamps, and
so on are examples.
3. If you are out shopping for clothes and books, what is easiest
and most convenient for you to spend: M1 or M2? Explain your
answer.

The currency and checks in M1 are easiest to spend. It is


harder to spend M2 directly, although if there is an automatic teller
machine in the shopping mall, you can turn M2 from your savings
account into an M1 of currency quite quickly. M1 money and checks
are the simplest to spend. It is more difficult to spend M2 directly,
but if there is an ATM at the shopping center, you can rapidly
convert M2 from your savings account into M1 currency. If you say
"credit cards," you are truly talking about spending M1—albeit M1
from the credit card company's account, which you will reimburse
later when your credit card payment is due.

4. For the following list of items, indicate if they are in M1, M2, or
neither:
a. Your $5,000 line of credit on your Bank of America card
b. $50 dollars’ worth of traveler’s checks you have not used yet
c. $1 in quarters in your pocket
d. $1200 in your checking account
e. $2000 you have in a money market account

a) Neither in M1 or M2
b) That is part of M1, and because M2 includes M1 it is also part of M2
c) Currency out in the public hands is part of M1 and M2
d) Checking deposits are in M1 and M2
e) Money market accounts are in M2

Practice Task/Assessment
1. What are the four functions that money serves?
Money serves several functions: a medium of exchange, a
unit of account, a store of value, and a standard of deferred
payment. There are two kinds of money: commodity money, which
is an item used as money but also has value because it can be used
for something other than money, and fiat money, which has no
intrinsic worth but is declared by a government to be a country's
legal tender.

2. How does the existence of money simplify the process of buying


and selling?
  Money simplifies the process of buying and selling
by being readily available, instead of people having to barter with each
other for a good or service.

3. What is the double-coincidence of wants?


The situation in which the demands of both purchasers and
sellers are simultaneously fulfilled during the process of exchanging
mutually owned items is known as double coincidence of wants.
Both the seller and the buyer must agree to sell and buy each other's
goods.

4. What components of money do we count as part of M1?

M1 money supply includes coins and currency in circulation


—the coins and bills that circulate in an economy that the U.S.
Treasury does not hold at the Federal Reserve Bank, or in bank
vaults. Closely related to currency are checkable deposits, also
known as demand deposits.

M2 is a measure of the money supply that includes cash,


checking deposits, and easily-convertible near money. M2 is a
broader measure of the money supply than M1, which just includes
cash and checking deposits.

CRITICAL THINKING QUESTIONS

1. The Bring it Home Feature discusses the use of cowrie shells


as money. Although we no longer use cowrie shells as money,
do you think other forms of commodity monies are possible?
What role might technology play in our definition of money?

The technology also provides money in the form of incentive


points, and the most recent innovation is bitcoin, a cryptocurrency
that is solely treated as money.
Concept Introduction
Commodities are objects that have great value in terms of
money. Their value is created by determining the commodity that
is traded in exchange. Earlier, the barter system was also
followed as an exchange along with money. But now, money is
only used to buy or sell goods and services.
 Explanation
As the economy grew, the use of commodities became less
and money came into the picture. All people must accept money
to buy or sell goods or services because at present it is the only
mode. Money transactions have rapidly become online in the
form of debit and credit cards too. The technology also offers
money in form of reward points and the latest innovation is
bitcoin which is a crypto currency that is also treated as money.
2. Imagine that you are a barber in a world without money.
Explain why it would be tricky to obtain groceries, clothing,
and a place to live.

The barter system of exchange was an exchange system in


which goods were exchanged for goods. This system was used in
ancient times when there was no medium of exchange and hence
no money to exchange, so goods were exchanged for goods.
There were other downsides to this system, such as the lack of
money, which resulted in no fixed value for anything. This
question addresses this issue as well as the problems of having a
barter system in our economy.

3. Explain why you think the Federal Reserve Bank tracks M1


and M2.

As we will discuss in the next chapter, one main task of the


Federal Reserve is to control the size of the money supply. As
you already know, a too-rapid increase in the money supply will
cause inflation. As you will learn in the next chapter, changes in
the money supply will also affect aggregate demand. The Fed
must measure the money supply to see if it is too big or too small

PROBLEMS

1. If you take $100 out of your piggy bank and deposit it in your
checking account, how did M1 change? Did M2 change?

M1 consists of currency, traveler's checks, and all


checkable accounts
owned by the non-bank public while M2 consists of M1 plus
savings accounts, money market funds, certificates of deposit,
and other time deposits.
So to answer the question. Neither M1 nor M2 changed. All
that happened was that the form of M1changed; you have less
currency but a larger checking account.

2. A bank has deposits of $400. It holds reserves of $50. It has


purchased government bonds worth $70. It has made loans of
$500. Set up a T-account balance sheet for the bank, with assets
and liabilities, and calculate the bank’s net worth.

Step 1
We are given the following information about the bank for the
task:
Deposits = $400
Reserve = $50
Government bonds bought = $70
Loans: $500

Step 2
Next, we sort these into assets and liabilities:
Assets: reserve, bonds, bought by the government, loans
Liabilities: deposits

Assets are something the bank owns, and the liabilities what it
owes.

Bonds and loans are the assets since they get payment from them
through time, and he reserves since they are kept by the bank for
possible deposits.
Deposits are liabilities since the bank owes them to the clients
that entrusted them to the bank.

Step 3
To get the net worth of the bank, we have to ake the assets and
substract them to the liabilities.
For this task it goes as follows:

Net worth = Assets – Liabilities


= ($50 + $70 + $500) - $400
= $620 - $400
= $220

Step 4
Now we show the results within a T – account
Assets Liabilities + Net worth
Reserves $50 Deposits $400

Government bonds $70

Loans $500 Net worth $220

Total amount $620 $620

Result
Net worth = $220

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