1. What Is Money?
Money is anything that is generally accepted in exchange for goods and services.

1. Functions of money
   
   

• Medium of exchange: Money increases the efficiency of the economy by minimizing transaction costs.
  
  

Teaching Strategy: Ask your class why money needs to be portable to be an effective medium of exchange.

• Unit of account: Money use reduces information costs.
  
  

Teaching Strategy: To show how money use reduces information costs, ask your students to list the prices that would be needed in a barter economy that produces only three goods. Then show that in an economy with money, only three prices are requiredthe price in terms of the monetary unit.

• Store of value: Durability and inflation can affect this function.
  
  

Teaching Strategy: If you have students in your class from the former Soviet Union or other countries in which there has been high inflation, ask them what strategies are common for dealing with money that is no longer a good store of value.

• Standard of deferred payment: Debt obligations are written in terms of money values.
  
  
• The U.S. money supply includes assets that serve the functions of money. Economists have found it difficult to determine whether an asset is a monetary asset.
  
  Teaching Strategy: Point out that because many assets can serve as monetary and nonmonetary assets, it is difficult to measure the true supply of money.
  
  

• M1 money supply is made up 49 percent of currency accounts and 1 percent of travelers checks.
  
  

Teaching Strategy: You can use the office coffee kitty as a case study in Greshams Law. Over time the kitty becomes filled with foreign coins, video game tokens, pennies, and almost anything that will make a jingling sound. Eventually, most of the good coins disappear.

• M2 money supply
  
  

• M3 money supply
  
  

Global money: The money supplies of different countries are linked through the foreign exchange market.

• The euro was expected to challenge the U.S. dollar as a reserve currency, but has not yet done that.
  
  

2. Banking
An important change has been the growth of interstate banking.

1. Financial intermediaries are the links between savers and borrowers in the economy.
   
   
2. U.S. banking
   
   

• The structure of banking went through many changes in the 1980s.
  
  
• Bank deposits are insured up to $100,000by the Federal Deposit Insurance Corporation (FDIC).
  
  

Teaching Strategy: It should be noted that, from the perspective of depositors, the FDIC has been a very effective institution. Depositors have been protected, and the banking system has not suffered a banking panic since the Great Depression.

1. International banks are highly competitive with domestic banks because they have less restrictive regulations.
   
   
   • Eurocurrencies are deposits that are denominated in the Eurocurrency market in the currencies of countries other than the countries in which the deposits are made.
     
     
   • International Banking Facilities (IBFs) allow international banking to take place within the United States.
     
     
2. Informal financial markets are prevalent in many developing countries where a large percentage of the population does not use formal financial institutions.
   
   Rotating Savings and Credit Associations (ROSCAS) are groups who contribute to a common fund and then members of the group take turns using the resources.
   
   The hawala network, which allows Muslims living around the world to send money back to their families, received considerable publicity after the September 11, 2001, attacks on the World Trade Center. The network makes tracking financial resources difficult.
   
   

3. Banks and the Money Supply
Banks create money by simply carrying out their normal business.

1. Deposits and loans are an example of how banks create money by lending money.
   
   Teaching Strategy: Be sure to work through the balance sheet analysis of how banks create deposits and the money supply. This is a most effective way to get a difficult idea across.
   
   
2. Deposit expansion multiplier
   
   Teaching Strategy: Draw parallels between the deposit expansion multiplier and the spending multiplier to build on ideas with which your students are already familiar.