Money

1. Money • Objectives • Describe the three uses for money • Explain the six characteristics of Money • Understand the sources of Money’s value • Explain how the money supply in the United States is measures • Explain the functions of financial Institutions • Understand Simple interest vs Compound

2. Three Uses • Money – is anything that serves as a medium of exchange, a unit of account, and a stored value 1. A medium of Exchange – is anything that is used to determine value during the exchange of goods and services - without money people Barter (direct exchange of good for a good) - money makes exchanges much easier 2. A Unit of Account – a means for comparing the values of goods and services - example – you know something is a good price when you have checked the price of the same good in another store 3. Store of Value – money keeps its value if you hold on to it – or store it - except when there is rapid inflation

3. 6 Characteristics of Money • Currency – coins and paper bills as money • Durability – If it wears out or easily destroyed it cannot be trusted as a store of value • Portability – Needs to be easily carried and transferred from person to person • Divisibility – Must be easily divided into smaller units – (16th and 17th cent. People used pieces of a coin to pay exact amounts) • Uniformity – Any two units of money must be uniform – Can’t have a gold quarter and silver one • Limited supply – if money was unlimited it would have no value – (Federal Reserve controls circulation) • Acceptability – everyone must be able to exchange objects that serve as money in exchange for goods and services – (Russian Rubles)

4. Sources of Money’s Value • Commodity Money – objects that have value in themselves and that are also used as money – example diamonds – not a good source of money • Representative Money – makes use of objects that have value because the can exchange them for something else of value – ex Gold for Paper receipts • Fiat Money – money that has value because the government has ordered that it is an acceptable means to pay debts – (money supply essential)

5. Measuring the Money Supply • Money Supply – all the money available in U.S. economy; travelers checks, currency, checking account deposits - to keep track economists separate M1 and M2 • M1 accessible money that have liquidity (used direct or easily converted to cash) - 48% currency outside of bank vaults - Demand Deposits or checking accounts - small portion travelers checks • M2 is all assets in M1 and others called near money – can’t be used as cash directly but fairly easy – (savings account)

6. Functions of Financial Institutions • Banks store money (insured in vaults) • Saving Money (CD’s, Savings, Checking) • Loans – lend money to profit off interest - Fractional reserve banking – a bank that keeps a little money on hand and lends the rest - If borrowers don’t pay back they default • Mortgages- loan to buy real estate – usually 15,20, 30 years • Credit Cards – a card able to buy goods based on promise to pay bank back

7. Simple and Compound Interest • Interest – is the price paid for the use of borrowed money • The amount borrowed is called the principal • Simple interest is interest paid on principal 100$ at 20$ simple interest = 120$ (month) • Compound Interest is interest paid on principal and interest - 100$ at 20% = 120$, next month 120$ at 20%=144$, 144$ at 20%=168$ • Interest and fees is how banks profit