The Nature and Creation of Money

Read these sections, "What is Money?" and "The Banking System and Money Creation", to examine money and its impact on real GDP and the price level.  Specifically, learn about what money is and its three functions. Distinguish between the M1 and M2 definitions of money. Also, learn about the money creation process and role of banks in it in a fractional reserve banking system. You will revisit certain sections of the chapter later in this unit.

What Is Money?

Key Takeaways

  • Money is anything that serves as a medium of exchange. Other functions of money are to serve as a unit of account and as a store of value.
  • Money may or may not have intrinsic value. Commodity money has intrinsic value because it has other uses besides being a medium of exchange. Fiat money serves only as a medium of exchange, because its use as such is authorized by the government; it has no intrinsic value.
  • The Fed reports several different measures of money, including M1 and M2.