Study GuideEconomics–Money and Banking1. Supply of MoneyThesupply of moneyrefers to the total amount of money available in an economy at a given time.Economists use different definitions to measure it, depending on how broadly they want to define“money.”Types of Money Supply•M1 (Narrowest and most common measure)•This includes:oCurrency in circulation (notes and coins)oCheckable deposits in banks (bank money)oTraveler’s checks•M2 (Broader measure)•This includes everything inM1, plus:oSavings depositsoTime deposits held in banks•M3 (Broadest measure)•This includes everything inM2, plus:oLarge, long-term time deposits (such as certificates of deposit over $100,000)In most discussions, economists focus onM1, because it represents money that can be usedimmediately for spending.1.1Banking Business and the Role of BanksTo understand how money is created, we first need to understandwhat banks do.Banks performtwo main functions:1.Accepting depositsPreview Mode
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