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Money. Chapter 10. What is Money?. Use of money is a social custom Its role is to facilitate exchange
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Money Chapter 10
What is Money? • Use of money is a social custom • Its role is to facilitate exchange • Money itself is any asset accepted as paymentfor goods or services • Without money we would barter like traditional societies • Although barter works it can be complex and inefficient
Functions of Money Medium of Exchange: commonly accepted payment Unit of Account: standardized and easily measured Store of Value: holds purchasing power over time
Characteristics of Money Durable—lasts for an extended period Portable—easy to carry & exchange Divisible—easily broken into measurable units Uniform—similar in appearance and has a standard value Scarce—Not overly printed or in too great abundance Accepted—Society is certain that it has value
Types of Money • Fiat—has value because the government says so • “legal tender” • Representative— stands in for money • IOU, silver certificate • Commodity—has other uses besides acting as money • Tobacco, water
How Much Money is Out There? http://www.youtube.com/watch?v=S-bJYM_7MLw • Money supplyall the money available in the economy • This includes money in and out of banks • Liquidity refers to how easily an asset can be turned into cash • Federal Reserve tracks the amount of money “in circulation” or in the economy
Finance • The Financial System—various markets, players and institutions that coordinate the channeling of funds between borrowers and savers • Borrowers—demand money from the system with the knowledge that they will have to pay it back with interest • Savers—supply money to the system with the expectation that it will be paid back to them with interest
Banks and Institutions • Investment Banks—raise money for companies (perhaps even nations)and manage wealth of private investors (merchant bank) • JPMorgan, Goldman Sachs • Credit Unions—cooperative lending for specific groups • Marshland, Teachers • Commercial Banks—offer a wide range of lending services to the public (retail bank) • Bank of America, United Community
Functions of a Bank https://www.youtube.com/watch?v=RH_bNdlOoiA • Banks serve several purposes: • Store Money—safe and insured • Vehicle for Saving— variety of accounts available • Loans—renting money at a cost • Credit—form of deferred payment • Principle is amount owed • Interest is cost of renting the principle
FDIC preserves and promotes public confidence in the U.S. financial system by • insuring depositors • identifying, monitoring and addressing risks to the deposit insurance funds • limiting the effect on the economy and the financial system when a bank or thrift institution fails