Money can be whatever society as a whole deems valuable. Money is an imperative element of the economy because it is essential in exchanging goods and services between buyers and sellers.
2. Describe the components of M1, M2 and M3. In general, how do they differ?
M1 includes the total amount of physical currency outside the banking system, demand deposits, traveler's checks, and other checkable deposits.
M2 includes M1, savings deposits, small time deposits, and money market mutual funds.
M3 includes M2, large time deposits, deposits of eurodollars, and repurchase agreements.
3. What is "the Fed" and its main purpose?
The "Fed," or Federal Reserve, is responsible for controlling the supply of money in the economy. It also regulates banks and makes sure the banking system is in a healthy financial condition.
4. Take a look at the following banking in-class demonstrations. Pick one of the three demos to perform with some friends, relatives, or other persons who owe you a favor:-)
1. Which demonstration did you choose and why?
I chose the money creation demonstration because I was curious to know more about how the Federal Reserve and the banking system facilitate expansion of the money supply.
2. Give a general description of your volunteers - approx age, gender, etc.
1. Which demonstration did you choose and why?
I chose the money creation demonstration because I was curious to know more about how the Federal Reserve and the banking system facilitate expansion of the money supply.
2. Give a general description of your volunteers - approx age, gender, etc.
My volunteers were my mother and her two friends. They are women in their late forties with a basic understanding of economics. My mom is a teacher, one of her friends is a writer, and the other is a lawyer.
3. How did the demonstration go overall?
I would say the demonstration went relatively well. While I had to go through it twice because we couldn't figure out exactly how to set up the activity, in the end we all understood the concept of banks expanding the money supply. We recorded each transaction on a balance sheet, which helped compare the ending bank deposits to the initial amount of money spent by the Fed.
4. Did the volunteers seem to understand the concept being demonstrated? Why or why not?
My volunteers seemed to genuinely understand the concept. They understood liabilities and assets, and the balance sheet was definitely useful.
5. Add any other comments you feel are relevant.
I think for this demonstration, participation is key to understanding the process. I tried to explain what would happen at first with no luck, but once my volunteers became involved in the money exchange, the concept was much easier to comprehend.
6. Did you enjoy this exercise and did you learn anything new by performing the demonstration? Why or why not?
I enjoyed this exercise because I feel like everything clicked and I understand the concept perfectly now (at least I think so). This demonstration brought clarity to the role of the Fed and banking system in expanding money supply.
3. How did the demonstration go overall?
I would say the demonstration went relatively well. While I had to go through it twice because we couldn't figure out exactly how to set up the activity, in the end we all understood the concept of banks expanding the money supply. We recorded each transaction on a balance sheet, which helped compare the ending bank deposits to the initial amount of money spent by the Fed.
4. Did the volunteers seem to understand the concept being demonstrated? Why or why not?
My volunteers seemed to genuinely understand the concept. They understood liabilities and assets, and the balance sheet was definitely useful.
5. Add any other comments you feel are relevant.
I think for this demonstration, participation is key to understanding the process. I tried to explain what would happen at first with no luck, but once my volunteers became involved in the money exchange, the concept was much easier to comprehend.
6. Did you enjoy this exercise and did you learn anything new by performing the demonstration? Why or why not?
I enjoyed this exercise because I feel like everything clicked and I understand the concept perfectly now (at least I think so). This demonstration brought clarity to the role of the Fed and banking system in expanding money supply.
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