Understanding money: Where is most of my money?

Students define money, practice identifying items in terms of their liquidity, and understand why misconceptions about money are so common

Principles of Macroeconomics course at the beginning of section on money, banking and monetary policy.

This activity follows the steps of an Interactive Lecture Demonstration

1. Prediction
   Create a list of different items that constitute wealth. The list could be presented by the instructor and should include: $10 bill; checking account; savings account; share in a corporation such as Coca-Cola; a government bond; gold bar; diamond ring; car, house; painting by Claude Monet (the list should be scrambled so as not to presume the degree of liquidity). Alternatively, students can brainstorm to create a similar list.
   
   Ask students individually to identify each item on the list as: "definitely money," "might be money," or "definitely not money." Students meet in pairs to compare, discuss, and, if desired, change their answer.
   
   The instructor analyzes the list to determine which items are money. Beginning with an analysis of older forms of money, the instructor points out that gold and silver have been used as money because of their ease of use as medium of exchange, standard of value and store of value. A similar case can be made for cigarettes in prisons. In a modern economy, only coins, currency, bank checks, and perhaps savings accounts serve this purpose. These are liquid assets.
   
   
2. Experience
   
   Working individually and confidentially (assure students that this data will not be collected), ask students to estimate how much they own in each of the following categories: coins, currency, checking accounts, and savings accounts. Then, ask each student to circle the category where they have the most. Poll the class, either with a show of hands, or if confidentiality remains a concern, through anonymous written reports, to determine which category is most important to most students—always a combination of checking and savings accounts. Thus, money as used by the class as a whole is not primarily coins and currency, but instead deposits in bank checking and saving accounts.
   
   Students place items on a "liquidity line," ranging from very liquid to illiquid assets. The activity can be conducted as a worksheet completed by small groups (See Handout for what is money (Microsoft Word 22kB Oct4 09)). Alternatively, these items can be written in large letters on sheets of paper, distributed to students who must tape the paper to the correct place on a classroom long "liquidity line" written on the board ranging, as on the handout, from very liquid, to somewhat illiquid, to illiquid. The entire class can then correct misplaced items.
   
   
3. Reflection
   
   
   • Students write a short essay beginning with the prompt: "Although most people believe that ______ and _______ are money, in fact .... "
   • Students view a video in which well-educated and articulate individuals misunderstand what is money on the modern economy. In a short written assignment, students explain why these individuals made these errors, and how they should be corrected.

The specific activities listed above are suggestions, and may be adjusted to fit the time available, class size, and prior knowledge by students. Nonetheless, attention should be paid to the Interactive Demonstration stages.

• Begin by helping students assess their understanding of the topic. If class time is limited, consider answers submitted before class using Just-in-time Teaching.
  
• The modeling skills practice most closely resembles a traditional lecture. However, student learning is more closely monitored through the prior and succeeding steps.
• The classroom demonstration is intended to bring about an "aha" moment, so consider using dramatic flair showing how surprising it is that by far most money does not exist as coins or currency. Use this insight to build interest in upcoming topics: where did this money come from?; how does this affect the government's ability to create money?

The resolution and reflection steps may be combined as long as students are able to reflect on what they learned (metacognition) and practice this learning in new conte

Student understanding of the definition of money can be assessed in the Interactive Demonstration reflection step: how well can students identify and correct the misconceptions shown in the video?

As a core concept to be used subsequently in the course, student understanding of the definition of money can be assessed when new topics are presented. For example: when money creation is introduced, first ask students how new money will be created in a modern economy? If the answer is by printing currency, then the understanding of "what is money" needs to be revisited. Similarly, when the role of central banks is introduced, ask how these institutions can control the money supply. Again, if the answer is by controlling the distribution of currency, then "what is money" need to be revisited.

For lively accounts of money in non- and pre-capitalist economies see NOVA/PBS web site.

For lessons on money see the US Federal Reserve.