hi everybody jaob Reed here from review eon.com today we're going to be talking about the measures and definition of money if after watching this video you still need a little more help head over to review eon.com and pick up the total review booklet it has everything you need to know to Ace your microeconomics or macroeconomics exams let's get into the content so before we had money we still had an economy we just didn't trade things for money we traded things with the barter system barter is when you trade goods and services for other goods and services often people say you're trading stuff for other stuff if one person has an umbrella but they're looking for a hammer they'll have to find somebody who has a hammer and also wants an umbrella we call that situation a mutual Coincidence of wants and once that person finds somebody who wants an umbrella and has a hammer they will exchange and both people will be better off as a result but of course finding that Mutual coincidence of once dramatically increases transaction costs and that's why we use money today so when it comes to the functions of money the first and most important function is that it serves as a medium of exchange it dramatically reduces transaction costs as compared to barter because now that person with the umbrella only has to find somebody who has money and wants the umbrella then they'll exchange and then this individual can take that money and purchase a hammer from somebody who has one the second function of money is that it serves as a unit of account or a standard of value products are both priced in dollars and value is measured in dollars when you go to the grocery store you look at different kinds of fruit that will have different prices on them and when you shop for clothing you will comparon shop using those price tags to help you determine the value and that's because dollars the money in the United States is used as a unit of account if one of your friends tells you they just got a new car for $22,000 you have a picture in your mind of what that car looks like it's likely got dents and scratches and a terrible paint job and barely runs if a different friend tells you they have a new car that cost $60,000 you have a very different picture in your mind and that's because when things are valued in dollars we have a sense of what that means it's because those dollars are a unit of account the final important function of money is that it is a store of value if a farmer works really hard and grows some strawberries the value of their hard work is in those strawberries but after a few weeks the value of those strawberries is going to plummet and the value of that hard work will be no more as the strawberries begin to mold but if that farmer sells the strawberries and now has money instead the value of that hard work will now be stored in the dollars for the foreseeable future of course the store of value isn't perfect we do have inflation and that reduces the purchasing power of our money now the Federal Reserve targets a 2% inflation rate and that means when the Federal Reserve hits that Target our money loses about 2% of of value each year well so where does money get its value from well first let's talk about the original forms of Money Original forms of money were usually commodity money that means items were valued in terms of livestock or bushels of wheat or cowry shells and of course gold was another form of commodity money commodity money is when the medium of exchange is actually valuable itself it has intrinsic value eventually societies moved away from commodity money and moved towards representative money instead with represent money each bill of the currency has some sort of commodity that gives it value so back when the United States had a gold standard every $500 gold certificate had $500 worth of gold that gave that bill value well today most modern economies don't have representative money anymore they have what is called Fiat money Fiat money represents value but has no intrinsic value and has no commodity backing it for the United States dollar there is no gold there is no silver there are no calry shells and there is no today our money has value because it can be used to purchase goods and services and of course it is backed by the United States government that's why every US dollar says it is legal tender for all debts public and private so next we're going to talk about how we measure the money supply we have three measures of the money supply the first one is the monetary base also called m0 This is the most narrow measure of the money supply and it includes both things that are money and things that are actually not considered money the monetary base includes both Bank Reserves and currency or coins and dollars Bank Reserves are the funds that banks have from the deposits of their customers but those Bank Reserves are not technically money because they aren't a medium exchange that means they aren't used to purchase goods and services but the currency the paper and the coins are money and they are part of the monetary base as well now the M1 money supply is money it includes both the currency we just talked about along with checkable deposits or checking account money and Sav deposits as well it's the M1 money that serves as a medium of exchange throughout the United States economy we also have a more broad measure of money and it is the M2 money supply it includes all of the money in the M1 money supply and it also includes some Mere Money this is money that is not immediately available as a medium of exchange but can be easily turned into a medium of exchange so we're going to include all of M1 and small time deposit M2 also includes money market mutual funds to make sure understand the differences between the monetary base and the M1 money supply let's take a look at this Vin diagram here we have the monetary base and the M1 money supply as I mentioned the monetary base has Bank Reserves that are not part of the M1 money supply the M1 money supply has checkable deposits and savings deposits which are not part of the monetary base and in the middle there we have the currency which is the paper and coin money and that is both part of the monetary base and the M1 money supply and of course it is that M1 money supply that is part of the M2 money supply which also includes small time deposits like certificates of deposit and money market mutual funds and there you have it that is everything you need to know about the definitions and measures of money if after watching this video you still need a little more help head over to reviewe eon.com and pick up the total review booklet it has everything you need to know to Ace your microeconomics or macroeconomics exams that's it for now I'll see youall next time