Introduction to Finance

LEARNING ACTIVITY
1. Go to the Federal Reserve Bank of St. Louis website, http://www.stlouisfed.org, 
access the Federal Reserve Economic Database (FRED) and fi nd information on the 
current money supply. Determine the current size of M1 and its four components, 
along with the size of M2.
2. Go to the Federal Reserve Bank of San Francisco’s website, http://www.frbsf.org. 
Go to the “Cash” tab and fi nd information on consumer use of cash, debit cards, 
and credit cards.
2.8
Money Supply and Economic Activity
Many economists believe that money supply matters when they try to manage economic activ-
ity. They have observed that economic activity, money supply, and the price levels of goods 
and services generally move together over time. However, economists disagree as to how these 
relationships are to be explained.
money market mutual funds 
(MMMFs) 
issue shares to 
customers and invest the proceeds 
in highly liquid, very short 
maturity, interest-bearing debt 
instruments
credit cards 
provide 
predetermined credit limits to 
consumers when the cards are 
issued

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C H A PT E R 2 Money and the Monetary System
The output of goods and services in the economy is referred to as the 
gross domestic 
product (GDP)
. Since we typically measure output in current dollars, we are measuring 
“nominal” GDP. Some economists, called 
monetarists
, believe that the amount of money 
in circulation determines the level of GDP or economic activity. If we divide GDP by the 
money supply (MS), we get the number of times the money supply turns over to produce GDP. 
Economists refer to the turnover of money as the velocity of money. More specifi cally, the