Chapter 30

Q:

1. What do we mean when we say, "money is whatever society says it is?"
2. Describe the components of M1, M2 and M3. In general, how do they differ?
3. What is "the Fed" and its main purpose?
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:-) You are to act as the teacher in the demonstration and you are to attempt to teach the group the concept the demonstration is attempting to illustrate. Once the role playing is completed, answer the following questions.
1. Which demonstration did you choose and why?
2. Give a general description of your volunteers - approx age, gender, etc.
3. How did the demonstration go overall?
4. Did the volunteers seem to understand the concept being demonstrated? Why or why not?
5. Add any other comments you feel are relevant.
6. Did you enjoy this exercise and did you learn anything new by performing the demonstration? Why or why not?

A:

1. "Money is whatever society says it is" means that the inherent value of money depends on what it represents in the a society. As stated in the Mankiw book, money itself, as in the paper and ink that is used to make money, does not have much value. What the money represents in a society is of the greatest importance, the amount of money that a good or service cost represents the relative scarcity of that good or service in the society. Everyone in a society that is choosing to use government issued money is accepting that the money has value in that society, and by using it, an individual is accepting the relative value that all the other members of society place on that individual unit of money.

2. The components of M1 include, but are not limited to: deposits, travelers checks, checked deposits, and currency. M2 components include all of M1, and in addition, savings deposits, small deposits, and money market and mutual funds. M3 is no longer measured, but would include all of M1 and M2, plus large, long term deposits. Each category differs from one another by including one more, generally larger, more encompassing measure of money.

3. The "Fed" is the Federal Reserve, a central bank organization that is responsible for regulating the monetary system, including the quantity of money in the economy. Its two main purposes are to regulate banks and the banking system including acting as a "bank's bank"...and the second purpose is to regulate the amount of money in the economy.

4. I chose the third demonstration, "The Inflation Fairy". I chose this because it seemed the easiest to do with 2 people, seeing as how I only had my husband as a volunteer. He is 26 yr old male. In order to conduct the demonstration, I read the senario about overnight inflation, and asked him what he thought about what it would do to us, and the economy. He had a very good understanding of what I was asking him, and was able to easily follow along. His first reaction to the question of what would happen if prices and incomes doubled overnight, was correct, he said "nothing". As we were talking more about it, he mentioned that you would be hurt if you were a family or business that holds a great deal of cash on hand. For example, we are in the process of saving so that I can go back to school. If prices doubled overnight, essentially, we would have half the savings we have now. True, we would be making more money, but all the work we had put into saving would be halved, as now everything is just as proportionally expensive. In the short term, businesses would have a major cash shortage. All payroll expenses would be twice as much, but the money from adjusted, inflated prices, may not have flown in yet. Overall, this demonstration was interesting, because we had a good discussion about inflation. I did learn something new, my husband really brought up the point about people that deal primarily in cash, and that was somewhat on the answer sheet, but a really good point for further discussion.