_____________ University
1-Dash Riprock goes shopping at the local music store he sees a CD of his favorite singer Elvis Costello for only $5. Dash picks up the CD to buy it and then at the last minute he sees another CD of another one of his favorite performers, the Beasty Boys, for $7 and next to it is his favorite all time girl band, the Spice Girls for only $10. This is money acting as?
This is money serving as a medium of exchange. Dash can buy any CD he would like to own with the money he has. The different singers’ CDs have different values in the music market. Dash, with the money he has, can buy any of the CDs easily because money is a medium of exchange. It is possible that someone might exchange this cd by comparing their prices easily. Following this idea, the money makes it easy for Dash to buy any CD he would like to. Thus, the money works as a tool for him to purchase one of the similar items.
2-Crunch Hardtack visits the local zoo. He notices there is a charge to see each animal. It costs $45 to see the monkeys and $78 to see the anteaters and $94 to see the snails. Being a snail lover, Crunch gives the clerk $94 and goes in and sees the snails. This is money acting as?
This is money acting as a unit of account. Seeing different animals are relevant services provided by the Zoo management. The money is used to measure the relative worth of various services offered by the Zoo management. However, it is not possible to exchange the services of being able to see different animals in the Zoo. Therefore, this is money acting as a unit of account. Crunch will use a service that will only allow him to see different animals. In this meaning, the money helps Crunch to value various services provided for him.
3-Bolt Upright wants to take a vacation. He searches on the internet to find the perfect spot to visit. He finds a 3-week vacation in Siberia for only $1000. Then he finds two weeks of fun in Death Valley, California for only $1500. He also notices that he could spend one wonderful week of fun and relaxation in the Sahara Desert for only $2000. At the last minute, Bolt changes his mind and decides to put the vacation off and place his money in a savings account. This is money acting as?
This is money serving as a store of value. The money can save the value over time. In another word, people can delay their consumption to the future, and they can consume the values are not spent today. Bolt is doing this, and he is saving his money today to spend in the future. In the past, people were using different items to protect the value they produced over time such as wheat, other crops, gold, or silver. In the modern times, the money carries a value guaranteed by the national governments. Saving goods like wheat or other crops is not safe enough for people because these crops might get rotten over time. Saving gold, silver, or other valuable mines are also costly for people because they need to spend some for providing security for these items. However, money is relatively easier to keep.
4-Johnny B Wise has $5000 in his savings account. What function does money play for Dash, Crunch, and Bolt? Explain why Johnny's money is or is not part of the M1, and M2 money supply.
For Dash, money is a medium of exchange. For Crunch, it is a unit of account, and for Bolt, it is a store of value. The money Johnny is keeping in the bank is the part of M2 because M1 includes only the liquid money in the markets. M2 includes M1 and money deposited into the banks.
Johnny’s money is a part of M2 because M2 includes the liquid money in the markets and the money deposited into the banks. M1 represents more liquid money than M2 because transforming the bank money into liquid takes relatively more time.
5-Do some research and find the M1 and M2 levels of money supply in the U.S. economy for the past 20 years. After you have found this information, begin to think like an economist and explain how you feel these levels of both M1 and M2 have affected GDP during the same period.
M1 is the liquid money in the real markets. M2 is M1 and the money deposited into the banks. Therefore, M1 is more liquid than M2. The last 20 years of M1 and M2 is exhibited in the graph below. Also, the real gross domestic product (GDP) is given below. Analyzing the M1 and M2 chart indicates that the increase in M2 is much higher than the increase in M2. The money deposited into the banks allow the investors to created new investments. The rapid growth in M2 let the American investors make new investments. Therefore, the production in the American economy has increased over the last 20 years, and the income level in the American economy has risen. We can see these facts in the graphs below.
Graph 1: M1 and M2
Graph 2: Real Gross Domestic Product
References
Financial Sense. (2012). The GDP Deception | Barry Ferguson | FINANCIAL SENSE. Retrieved 14 February 2016, from http://www.financialsense.com/contributors/barry-ferguson/2012/01/24/the-gdp-deception
Mankiw, N. (1997). Monetary policy. Chicago: University of Chicago Press.
Mishkin, F. (1998). The economics of money, banking, and financial markets. Reading, Mass.: Addison-Wesley.
