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CH 10: Money and the Financial Market

CH 10: Money and the Financial Market. 10A Money. What is money? Game. 10A Money. What is money- Anything that a society commonly uses and generally accepts as payments What is legal tender? Commonly used and accepted US Congress approved: all creditors must accept. 10A Money.

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CH 10: Money and the Financial Market

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  1. CH 10: Money and the Financial Market

  2. 10A Money • What is money? • Game

  3. 10A Money • What is money- • Anything that a society commonly uses and generally accepts as payments • What is legal tender? • Commonly used and accepted • US Congress approved: all creditors must accept

  4. 10A Money • 3. List the Functions of Money • A. Means of Payment: use money (vs. barter) to reduce cost & effort of doing business • How is bartering a hindrance to economic growth? • Double coincidence of wants • Relative price equation N(N-1)/2=# of price combinations • B. Measure of Value: yardstick to measure relative value • Ex. $500 computer or 5 heads of cattle • C. Means of Storing Purchasing Power: products spoil so needed something that could hold power longer. Money retains face value to some extent but subject to spoilage like inflation

  5. 10A Practice • 1. John paid cash for his car • 2. That hairspray can costs $1.50 • 3. I feel better having at least $10 in my wallet • A. Means of payment • B. means of storing purchasing power • C. Measure of value

  6. 10A Money • 4. What are the desirable characteristics of money (rather than another object; beads)? • A. Convenience and Portability • B. Divisibility • C. Durability (paper=18-22 months vs coins=several decades) • D. Stability

  7. Biblical Discussion • Is money evil? Is being wealthy evil? Discuss using scriptural references. Mark 8:36, I Tim. 6:10, Prov. 10:4, Ecc. 5:19…. • If we are to give our best efforts to pursue what God values, what are some of those things? • Take Away: do not let $ or the things it can buy control our lives.

  8. 10 A Money • 5. Identify 3 different kinds of money • A. Commodity $ (ex. Seashells, then progress to rare items like gold or silver.) • We use token coins: coins contain a quantity of metal less than face value, a one-ounce $1 coin might not equal a $1 in gold. • B. Representative $ • (birth of paper money in 15th and 16th century. Gold stored with goldsmith who gave deposit receipt. Those with solid reputations allowed to exchange deposit receipt like actual money). • C. Fiat Money ($ not backed by gold or something of value) • Gov’t took over storing gold deposits and passed legal tender laws. Forced to accept fiat money. All $ in the USA is fiat $.

  9. 10B The Financial Market • The financial market is a theoretical market. • Consists of insurance, investment, thrift and banking companies • Purpose: assists households in circulating money (circular flow model pg. 35) • Most important: the commercial banks • History of Banks: • Began in Renaissance Italy- busy marketplace in Florence. Sat on benches called bancos • Medici family- Pope’s Bankers

  10. 10B Financial Market • History of Banking in the US • 1. Free banks: unregulated, unsound • 2. 1864- National Banking Act with national currency. Resulted in a Dual Banking System of National and State Banks. (See picture pg. 197) • Commercial Banks: heavily regulated to insure funds • Defined as accepts deposits and makes loans • Regulations: charter (authorization to exist), then subject to regulatory agencies. * FDIC insures federal deposits up to a certain amount of money, standard $100,000 • Function: accept deposits, offer loans, and provide misc. financial services (i.e. safe deposit box, traveler checks etc.)

  11. 10B Financial Markets • Three kinds of thrifts: • 1. Savings and Loans (S&L): collect $ in interest bearing savings accounts and use capital to extend loans usually in home mortgages • 2. Mutual Savings • 3. Credit Unions: group of people with common interests who pooled savings for lending usually mortgage and checking accounts.

  12. Economic Theorist- Milton Friedman • Leading economists in the late 19th century. Strong supported of laissez-faire capitalism and denounced government interference in the marketplace. • Won a Nobel Prize in Economics • According to Milton Friedman a stable economy depends on the money in circulation. • This approach to money is called the monetarist approach. • Advocated gov’t control of the money supply otherwise leave the market alone.

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