Introduction to Finance

Money market mutual funds (MMMFs)
issue shares to customers and invest the pro-
ceeds in highly liquid, very short maturity, interest-bearing debt instruments called 
money 
market investments. 
MMMFs get their name from the type of investments they make. The 
nature of their investments, coupled with payment of interest daily, keeps MMMF shares 
valued at $1. Many MMMFs allow shareholders to write checks against their accounts. When 
checks are cleared and presented to the MMMF for payment, the number of shares owned 
by the shareholder is reduced accordingly. This process, of course, is very similar to writing 
checks against checkable deposits held at depository institutions. However, rather than includ-
ing retail MMMF balances in M1, the Fed decided that consumers use the accounts more as a 
store of purchasing power and less as a medium of exchange. 
Exclusions from the Money Supply
The Fed excludes certain stores of value and borrowings from its money supply defi nitions. 
For example, stock and bond mutual funds held by individuals represent stores of value, and 
some even permit limited check writing against these accounts. However, because the value of 
shares in these funds often fl uctuates widely and individuals may hold these security invest-
ments for a long time, the Fed does not consider these to be part of the money supply.
Credit cards
provide predetermined credit limits to consumers at the time the cards are 
issued. No checkable or other deposits are established at the time of issue. Thus, neither credit 
card limits nor outstanding balances are part of the money supply. Rather, credit cards just 
allow their holders to borrow up to a predetermined limit. However, the use of credit cards can 
aff ect the rate of turnover of the money supply and may contribute to money supply expansion. 
If credit card borrowing stimulates the demand for goods and services, a given money supply 
can support a higher level of economic activity. We will explore the relationship between 
money supply and economic activity in the next section. Also, when you use your credit card 
to purchase a product for, say, $50 at a retailer, the bank that issued the credit card lends you 
$50 and increases the retailer’s demand deposit account by $50. As your credit card balance 
increases as you purchase goods and services on credit, the checkable deposit accounts of 
those who sold the goods and services also increase. Of course, users of credit cards must 
eventually pay off their debts.