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Where does money come from?

 

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Money, Money Everywhere

 

When you find a penny on the street or you watch your mom pay for something at the store, do you ever wonder where the money comes from?

 

M-1 Means All the Money
Our government, mostly through an agency called the Fed (short for Federal Reserve Board), decides how much money to print. The money who work for the Fed count all of the money “out there” in circulation. They check how much is in bank accounts and other places where people keep their money. They check how banks are lending money and whether it’s easy or hard for people to get a loan.

They add up all the money out there and call the total M-1.

  • If M-1 is high, there is too much money – which can make prices go up. Rising prices is called inflation. When M-1 is high, the Fed can print less money and do other things to discourage people from borrowing money and banks from lending it.
  • If M-1 is low, the Fed can print more money or do other things that will encourage borrowing and lending.

 

Recovery and Recession
Why should the government control the supply of money? Because your money and mine – all our money – is connected.

If there is lots of money, people spend. Many even borrow money and spend that. If people spend, business does well. If business does well, more people have jobs. They then have more money tol spend. This is called a recovery or an expansion.

With less money around, there is less spending, less borrowing, less business and fewer jobs. This is called a recession.

There have been eight recessions in your parents’ lifetime. That shows the economy changes; it cycles from recession to recovery and back again. If we realize that times change for good and bad, we can prepare for both.

 

 

 

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