Introduction

Section 9.1

Section 9.1 is a brief section which deals with money and credit. You have to be able to define money and distinguish in broad terms between the different monetary aggregates (M1A, M1, M2 and M3). You must also be able to relate the monetary aggregates to the functions of money and explain why monetary aggregates are monitored closely in the financial markets.

1 It is fairly simple to determine a minimum wage.

2 Money is primarily a medium of exchange (or means of payment).

3 M1A is a measure of the stock of money which focuses on the function of money as a medium of exchange.

4 M1 is the monetary aggregate which was used as the basis for the Reserve Bank's money supply guidelines in the 1980s and 1990s.

5 Monetarists' interest in monetary aggregates is based on their view that there is a strong correlation between the growth in the money stock and the rate of inflation.

6 Participants in the financial markets monitor the growth in monetary aggregates as an important part of their efforts to predict possible changes in interest rates.