Definition, Measurement, and Functions of Money - AP Macroeconomics

Bad money drives out good money when both are legal tender. People hoard valuable money and spend less valuable money.

Stored electronically, facilitates transactions via digital platforms. Includes digital currencies, credit cards, and mobile payments.

Sum of currency in circulation and reserves held by banks. Foundation upon which the broader money supply is built.

Money is any item accepted as payment for goods and services. Must be widely accepted and trusted by society.

Medium of exchange, unit of account, store of value. These functions make money useful in modern economies.

Facilitates transactions by eliminating the need for barter. Avoids the inefficiency of trading goods directly.

Standard numerical unit for pricing goods and services. Allows comparison of relative values across different items.

Preserves wealth for future use, retaining value over time. Money maintains purchasing power across time periods.

Currency without intrinsic value, established by government decree. Backed by government authority, not physical commodities.

Money that has intrinsic value, such as gold or silver. Value comes from the material itself, not government backing.

Money that represents a claim on a commodity, like a gold certificate. Can be exchanged for the underlying commodity it represents.

Total amount of monetary assets available in an economy. Controlled by central banks to influence economic activity.

Currency, demand deposits, traveler's checks, other checkable deposits. Most liquid forms of money readily available for spending.

M1 plus savings deposits, small time deposits, money market funds. Broader measure including less liquid but accessible funds.

Ease with which an asset can be converted into cash. Cash is perfectly liquid; other assets vary in liquidity.

Open market operations, discount rate, reserve requirements. These are the Fed's three main monetary policy tools.

Buying or selling government securities to influence money supply. Primary tool for implementing monetary policy decisions.

Interest rate at which banks borrow short-term funds from the Federal Reserve. Higher rates discourage borrowing; lower rates encourage it.

Minimum reserves a bank must hold against deposits. Higher requirements reduce lending; lower requirements increase it.

Manage monetary policy, stabilize the currency, act as lender of last resort. Provides stability and oversight for the financial system.

Rate at which money circulates in the economy. Higher velocity means money changes hands more frequently.

MV = PQ, where M is money supply, V is velocity, P is price level, Q is output. Shows relationship between money, prices, and economic output.

Theoretical separation of real and nominal variables in the economy. Money affects nominal but not real economic variables.

Nominal interest rate minus inflation rate. Shows the true purchasing power of borrowed money.

Situation where monetary policy is ineffective due to low interest rates. Occurs when interest rates approach zero percent.

Facilitates transactions over time, enabling credit and loans. Money allows payments to be made in the future.

Sustained decrease in the general price level of goods and services. Opposite of inflation; prices generally fall over time.

Erodes purchasing power of money. Same amount of money buys fewer goods and services.

Concept that changes in money supply only affect nominal variables. Money changes don't affect real economic activity long-term.