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Introduction to Money

Introduction to Money. What exactly is money?. MONEY. Money- anything used to facilitate the exchange of goods & services between buyers and sellers. anything that is readily acceptable as payment. The yardstick people use to post prices and record debts.

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Introduction to Money

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  1. Introduction to Money What exactly is money?

  2. MONEY • Money-anything used to facilitate the exchange of goods & services between buyers and sellers

  3. anything that is readily acceptable as payment The yardstick people use to post prices and record debts Any item that people can use to transfer purchasing power from the present to the future 3 Functions of Money • Medium of exchange • Unit of account (or standard of value) • Store of value

  4. 2 Kinds of Money • Commodity moneytakes the form of a commodity with intrinsic value • Examples: Gold, silver, cigarettes • Fiat money is used because of Government decree • It does not have intrinsic value • Examples: Coins, currency, check deposits • U.S. money is not backed by anything!

  5. Liquidity • Liquidity is the ease with which an asset can be converted into currency • U.S. financial markets are the most liquid in the world • During the financial crisis subprime mortgages lost all liquidity

  6. Money in the U.S. Economy • Currency in the form of paper bills & coins • Demand deposits- balances in bank accounts that can be accessed “on demand” by writing a check • Savings accounts are not considered demand deposits • Money Supply- total money in the financial system. It is measured 3 ways known as M1, M2 & M3

  7. M2 $6,398 • Savings deposits • Small time deposits • Money market mutual funds • A few minor categories ($5,035 billion) M1 $1,363 • Demand deposits • Everything in M1 • Traveler ’ s checks ($1,363 billion) • Other checkable deposits ($664 billion) • Currency ($699 billion) Measures of Money Stock Billions of Dollars 0

  8. Money Supply • M1 - most liquid • M2 - slightly less liquid • M3 = M2 + large time deposits(over $100,000) • Less liquid than M2 (bank CD’s) • At any given time, the supply of money is fixed • The Federal Reserve regulates the quantity of money

  9. Where Is All The Currency? • 2004: $699 billion of U.S. currency outstanding • $3,134 in currency per adult • Who has all this currency? • held abroad • held by illegal entities

  10. Money Worksheet

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