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DO NOW:. In 50 words or less, what is MONEY?. THE HISTORY OF MONEY. Video Tutorial:. ECON LINKS PAGE - VIDEO TUTORIALS…Scroll down to MACROECONOMICS - Episode #29: What Is Money (4:28 ) EPISODE #29: WHAT IS MONEY?. MONEY….

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  1. DO NOW: • In 50 words or less, what is MONEY?

  2. THE HISTORY OF MONEY

  3. Video Tutorial: • ECON LINKS PAGE - VIDEO TUTORIALS…Scroll down to MACROECONOMICS - Episode #29: What Is Money (4:28) • EPISODE #29: WHAT IS MONEY?

  4. MONEY… …is an object or thing which is accepted as a payment for goods or to settle debts

  5. FUNTIONS of MONEY: • MEDIUM OF EXCHANGE • UNIT OF ACCOUNT (measure of value) • STORE OF VALUE

  6. 5 characteristics of money: • Generally acceptable • Durable (for use in multiple transactions) • Portable (easy to carry and use) • Divisible (bills & coins of graduated amounts) • Scarce

  7. BARTER! • Trade of goods for other goods • Inefficient because it requires a DOUBLE COINCIDENCE OF WANTS (You gotta’ have exactly what I want, and I gotta’ have exactly what you want • MONEY replaces barter as a means of acquiring goods

  8. KINDS of MONEY: • COMMODITY MONEY : • gets its value from what it’s made from • a usable good with INTRINSIC value • precious metals like gold, silver • cigarettes or chocolate bars in WWII • FIAT MONEY: • gets its value from a legal decree • little or NO intrinsic or useful value on its own

  9. THE MONEY SUPPLY • Is the stock of liquid assets in a given economy, which can be exchanged for goods and services • It is NOT merely the amount of CURRENCY! • LIQUIDITY: is how easily an asset can be converted into currency • CURRENCY: money in the form of paper or coins • PAPER MONEY can be backed by • Commodity • Fiat

  10. CURRNECY • money in the form of paper or coins • can be backed by • Commodity • Fiat

  11. Other forms besides currency: • DEMAND DEPOSITS: • stored in a bank account • can be withdrawn at any time upon demand • Also called CHECKABLE DEPOSITS • TIME DEPOSITS: • stored in accounts at banks, but… • cannot be withdrawn on demand without a substantial penalty • Ex.: CD – certificate of deposit – 6 mo., 1 yr., etc. • MONEY MARKET ACCOUNTS: • stricter rules than DEMAND, but… • looser rules than TIME DEPOSITS

  12. THE MONEY SUPPLY: • M1: extremely LIQUID • Currency • Traveler’s checks • Demand Deposits • M2: broader and less liquid • M1 PLUS • Money in SAVINGS ACCOUNTS & shorter TIME DEPOSITS (money market accounts) • M3: M1 and M2 + more ILLIQUID forms (long time deposits) • L: broadest definition – M1, M2, M3, and commercial papers and deeds

  13. The Equation of Exchange: • MV = PQ • M= the stock of money (how much) • V=the velocity of money (how often it turns over or changes hands) • Q=is the output of goods and services (quantity) • P=is the average current price

  14. FRACTIONAL RESERVE BANKING: • How banks MAKE money (a profit): • YOU deposit your money at interest • THEY lend it out or invest it at interest • The banks PAY you and keep the difference! • How banks CREATE money (increase the money supply): through FRACTIONAL RESERVE BANKING

  15. Video Tutorials : Creating Money with Fractional Reserve Banking • ECON LINKS PAGE - VIDEO TUTORIALS…Scroll down and choose MACROECONOMICS: EPISODE #30: Creating Money  (3:55) • EPISODE #30: Creating Money (3:55) • ECONOMICS USA SERIES– VIDEO ON DEMAND • Program #20: The Banking System(30:00)

  16. THE RESERVE REQUIREMENT: • The % of DEMAND deposits which a bank has to keep on hand in the vault to cover withdrawals • Rate is set by the FEDERAL RESERVE BOARD

  17. What BANKS do when they can’t cover all the day’s demands: • BORROW: • From the FEDERAL RESERVE BANK • The DISCOUNT RATE: the interest rate which the Fed charges banks for loans • BORROW: • From OTHER BANKS • The FEDERAL FUNDS RATE: the interest rate which banks charge banks

  18. Gresham’s Law • Sir Thomas Gresham • bad money drives good money out of circulation. • THEN…It was about DEBASEMENT • the reduction of a coin’s precious metal content. • Because non-debased coins, or ‘‘good money,’’ were more valuable, people hoarded these coins and spent the debased ‘‘bad money.’’ • NOW…It’s about INFLATION

  19. CARDS UP! Quiz • Money • Fractional Reserve Banking

  20. 1. The direct exchange of goods for other goods is known as • a. commerce • b. barter • c. finance • d. retail • e. wholesale

  21. 2. Money in the bank serves as a(n) • a. unit of account • b. medium of exchange • c. commodity • d. unit of value • e. store of value

  22. 3. Money used to buy clothing serves as a(n) • a. unit of value • b. commodity • c. store of value • d. unit of account • e. medium of exchange

  23. 4. The fact that I can spend a hundred dollar bill and receive a twenty, a ten, three ones, and forty-nine cents change illustrates which characteristic of money? • a. scarcity • b. acceptability • c. durability • d. divisibility • e. portability

  24. 5. The ease with which an asset can be converted into the economy's medium of exchange is referred to as its • a. transferability • b. exchangeability • c. liquidity • d. acceptability • e. durability

  25. 6. Which of the following forms of money is the most liquid? • a. time deposits • b. money market accounts • c. traveler’s checks • d. currency • e. demand deposits

  26. 7. Which function of money makes prices possible? • a. unit of account • b. medium of exchange • c. scarcity • d. store of value • e. divisibility

  27. 8. Which function of money does inflation most undermine? • a. scarcity • b. unit of account • c. medium of exchange • d. store of value • e. divisibility

  28. 9. Money must be able to be used over and over again without wearing out. This represents which characteristic of money? • a. durability • b. acceptability • c. divisibility • d. portability • e. scarcity

  29. 10. Money with intrinsic value is called • a. fiat money • b. commodity money • c. local money • d. legal money • e. bullion money

  30. 11. Which of the following is an example of fiat money? • a. Hershey bars • b. gold • c. yen • d. cotton • e. cigarettes

  31. 12. Money facilitates trade by removing the need for • a. voluntary exchange • b. a double coincidence of wants • c. property rights • d. supply and demand • e. markets

  32. 13. Devaluing coins by reducing the amount of precious metal in them and substituting base metals • a. voluntary exchange • b. a double coincidence of wants • c. debasement • d. hyperinflation • e. liquidity

  33. 14. If the reserve ratio is 10%, a bank with deposits of $1000 can loan out • a. $10 • b. $100 • c. $90 • d. $900 • e. $990

  34. 15. If the reserve ratio is 20%, the money multiplier is • a. 2 • b. 50 • c. 5 • d. 20 • e. 10

  35. 16. If the reserve ratio is 5%, how much money will be created in the economy by a deposit of $100? • a. $100 • b. $4000 • c. $2000 • d. $1000 • e. $500

  36. 17. The equation of exchange is • a. MQ = PV • b. MVP = Q • c. M = VPQ • d. MP = VQ • e. MV = PQ

  37. 18. How often money circulates through the economy; in other words, how many times a dollar bill is spent in a given time period: • a. velocity • b. portability • c. durability • d. divisibility • e. scarcity

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