1.

What is money
- Fiscal policy: changes in government spending/taxation to achieve particular macroeconomic
goals. Controlled by government
- Monetary policy: changes to the money supply in order to achieve particular macroeconomic
goals. Controlled by central bank
- Money: any good that is widely accepted for the purposes of exchange and in the repayment of
debts
- 3 basic functions of money:
+ money serves as a medium of exchange
barter works fine when there is double coincidence of wants
+ money serves as a unit of account
Money give a measurement in which values are expressed
+ money serves as a store of value: maintain value over time
- Money supply:
+ M1: includes the components of money that are most easily and immediately converted to
good and services/most liquid assets
+ M1 = currency held outside banks:
++ checkable deposit
++ traveler’s checks
+M2 = M1 + asset more difficult to convert to goods and services

++ small-denomination time deposits = CD = pay a penalty for cashing in early

+M3= M2+ long-term CDs and financial agreements

2. Creating money
a. Banks
- Take deposits
- Loan most of it out

-
b. Money multiplier

- : new money created from initial loan

- Start from the initial loan of the initial deposit (increase by….)
- Fractional reserve banking: banks hold a portion of deposits and loan the rest out
- Whenever loan out => create new money
- Required reserve ratio ( r ) is the legally-mandated percentage of total deposits that a bank must
keep on reserve

- : maximum change