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Mishkin • Instructor’s Manual for The Economics of Money, Banking, and Financial Markets, Twelfth Edition 16
Chapter 3
What Is Money?
Before becoming immersed in the study of money and banking, the student must understand how
money is defined and measured. The first half of Chapter 3 discusses the definition of money:
how the economist’s definition differs from that of common speech, the functions of money, and
a historical view of how what serves as money has changed over time. The second half of the
chapter describes the tricky issues involved in applying the definition of money in order to
measure it.
Once the student understands what money is, the most important point to get across to him or her
is that economists are not exactly sure how to measure money. This presents to policymakers a
serious problem: Although they might want to control the money supply to affect the economy,
they are not sure which measure of money is the right one to control. In many situations,
knowing which measure of money is the right one is not crucial because different measures (such
as Ml and M2) move together. But, as Figure 1 illustrates, this is sometimes not the case,
presenting the policymaker with a dilemma.
This chapter introduces FYI boxes, which highlight dramatic historical episodes, interesting
ideas, and intriguing facts to keep students excited about the material.
