CHAPTER 10.1 MONEY Three uses of $ 6 Characteristics of $ Source of $’s value MONEY Three uses of...
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Transcript of CHAPTER 10.1 MONEY Three uses of $ 6 Characteristics of $ Source of $’s value MONEY Three uses of...
CHAPTER 10.1 CHAPTER 10.1
MONEYThree uses of $
6 Characteristics of $Source of $’s value
MONEYThree uses of $
6 Characteristics of $Source of $’s value
Three uses of MoneyThree uses of Money
Money? Anything that serves as a medium of
exchange, a unit of account, and a store of value
1. Medium of exchange Determines the value during the
exchange of goods and services Bartering - direct exchange of one set
of goods/ services for another
Money? Anything that serves as a medium of
exchange, a unit of account, and a store of value
1. Medium of exchange Determines the value during the
exchange of goods and services Bartering - direct exchange of one set
of goods/ services for another
Still used today all over the world Becomes impractical as an economy
grows
Easier to use money than bartering No agreements necessary
Still used today all over the world Becomes impractical as an economy
grows
Easier to use money than bartering No agreements necessary
2. Unit of account A way to compare value of goods and
services
3. Store of value Keeps its value if it is stored rather
than used No expiration date *Inflation* - general increases in prices
2. Unit of account A way to compare value of goods and
services
3. Store of value Keeps its value if it is stored rather
than used No expiration date *Inflation* - general increases in prices
6 Characteristics of Money6 Characteristics of Money
Anything can be used as money Cattle, salt, gold, dried fish, furs,
porpoise teeth, tulip bulbs 1. Durability
Must withstand physical wear and tear
$1 lasts about a year in circulation Easily replaced
Anything can be used as money Cattle, salt, gold, dried fish, furs,
porpoise teeth, tulip bulbs 1. Durability
Must withstand physical wear and tear
$1 lasts about a year in circulation Easily replaced
2. Portability Must be able to conduct daily
business with it Easily transferred from one person to
another 3. Divisibility
Useful if it can be easily divided
2. Portability Must be able to conduct daily
business with it Easily transferred from one person to
another 3. Divisibility
Useful if it can be easily divided
4. Uniformity Must be able to count and measure
accurately
5. Limited supply Federal Reserve controls the supply
of money in circulation
4. Uniformity Must be able to count and measure
accurately
5. Limited supply Federal Reserve controls the supply
of money in circulation
6. Acceptability Must be able to use it anywhere Sudden loss of confidence will deflate
the value Euro = 1.37 USD
6. Acceptability Must be able to use it anywhere Sudden loss of confidence will deflate
the value Euro = 1.37 USD
Where does money get its value?
Where does money get its value?
3 types of money
1. Commodity Money• Objects that have value themselves
• Salt, Cattle, precious stones• Have a value other than money• Disadvantages?
3 types of money
1. Commodity Money• Objects that have value themselves
• Salt, Cattle, precious stones• Have a value other than money• Disadvantages?
2. Representative Money Holder can use it for something else
IOU Paper receipts for gold or silver Bills of credit
2. Representative Money Holder can use it for something else
IOU Paper receipts for gold or silver Bills of credit
3. Fiat Money Money that holds value because the
government says so Our money
Fed controls supply, govt says money has value so it is “legal tender”
3. Fiat Money Money that holds value because the
government says so Our money
Fed controls supply, govt says money has value so it is “legal tender”
10.2 10.2
Federal Deposit Insurance Corporation (FDIC) Govt agency that insures customer
deposits if a bank fails Covered up to $250,000 (2013)
Federal Deposit Insurance Corporation (FDIC) Govt agency that insures customer
deposits if a bank fails Covered up to $250,000 (2013)
10.3 Banking Today10.3 Banking Today
How is money supply measured
Services banks provide
Types of financial institutions
How is money supply measured
Services banks provide
Types of financial institutions
Money SupplyMoney Supply
All of the money available in the US economy M1 - Money immediately available
All assets that have liquidity Used as or directly converted to cash
All the money not in bank vaults Money in checking accounts
Demand deposits
Travelers checks
All of the money available in the US economy M1 - Money immediately available
All assets that have liquidity Used as or directly converted to cash
All the money not in bank vaults Money in checking accounts
Demand deposits
Travelers checks
M2 - all the money in M1 + additional assets Saving Accounts
Can’t be used as cash
Money Market Mutual Funds Money pooled together that is used to buy
short term securities
M2 - all the money in M1 + additional assets Saving Accounts
Can’t be used as cash
Money Market Mutual Funds Money pooled together that is used to buy
short term securities
BanksBanks
Services Banks offer 1. Storing money
Safe convenient place to keep money
Insured against robbery Federal Deposit Insurance Corporation
(FDIC) Covers accounts up to $250,000 (2013)
Services Banks offer 1. Storing money
Safe convenient place to keep money
Insured against robbery Federal Deposit Insurance Corporation
(FDIC) Covers accounts up to $250,000 (2013)
2. Saving Money Savings Accounts Checking Accounts
Most common Good for frequent withdrawals Small interest rates annually
2. Saving Money Savings Accounts Checking Accounts
Most common Good for frequent withdrawals Small interest rates annually
Money Market Account Allows a certain amount of checks written Interest can go up or down (Variable)
Certificates of Deposit (CD’s) Guaranteed amount of interest over a
specific time period Money cannot be used until time period
is over Penalties for removal
Money Market Account Allows a certain amount of checks written Interest can go up or down (Variable)
Certificates of Deposit (CD’s) Guaranteed amount of interest over a
specific time period Money cannot be used until time period
is over Penalties for removal
3. Loans Fractional reserve banking
Banking system that keeps only a fraction of funds on hand, lends out the rest
More it lends out, more money they make Business, car, home improvement,
college, personal Default
3. Loans Fractional reserve banking
Banking system that keeps only a fraction of funds on hand, lends out the rest
More it lends out, more money they make Business, car, home improvement,
college, personal Default
4. Mortgages - Used specifically for real estate 15, 20, 25 years or longer
Credit check, Can determine your rate and length
4. Mortgages - Used specifically for real estate 15, 20, 25 years or longer
Credit check, Can determine your rate and length
5. Credit Cards Issued by banks to individuals with
promise to pay back with interest Better credit will increase your
spending limit
5. Credit Cards Issued by banks to individuals with
promise to pay back with interest Better credit will increase your
spending limit
Interest - price paid for borrowed money Principal - amount borrowed
Two Types Simple interest- paid only on
principal $100 + 5% = $105
Compound interest - pays on both principal and interest accumulated
Interest - price paid for borrowed money Principal - amount borrowed
Two Types Simple interest- paid only on
principal $100 + 5% = $105
Compound interest - pays on both principal and interest accumulated
Types of Financial Institutions
Types of Financial Institutions
1. Commercial Banks Usually work with businesses Checking Accounts Accept deposits Some are regulated by States 1/3 are national banks part of the Fed
Res Play the biggest roles in our economy
1. Commercial Banks Usually work with businesses Checking Accounts Accept deposits Some are regulated by States 1/3 are national banks part of the Fed
Res Play the biggest roles in our economy
2. Savings and Loans (S&L’s) Originally established aid in home
building Save money in an account until you
have enough to buy a home Now offer many of the same functions
as other banks
2. Savings and Loans (S&L’s) Originally established aid in home
building Save money in an account until you
have enough to buy a home Now offer many of the same functions
as other banks
3. Savings Banks Started for people who made smaller
deposits than big companies Owned by those who deposited money
Shared the profits Turned to selling stocks Started the first checking accounts that
paid interest Negotiable Order of Withdrawal (NOW)
3. Savings Banks Started for people who made smaller
deposits than big companies Owned by those who deposited money
Shared the profits Turned to selling stocks Started the first checking accounts that
paid interest Negotiable Order of Withdrawal (NOW)
4. Credit Unions Cooperative lending institutions Particular groups Fairly small Specialize in types of loans
Better rates for members
4. Credit Unions Cooperative lending institutions Particular groups Fairly small Specialize in types of loans
Better rates for members
5. Finance Companies Make installment loans
Spread costs over a number of months Usually higher interest rates vs banks
5. Finance Companies Make installment loans
Spread costs over a number of months Usually higher interest rates vs banks
Electronic BankingElectronic Banking
Changed the way paper money is used ATMs
Deposit $ Withdrawal Balance info
Debit Cards Home Banking Automatic Clearing House Stored Value Cards (Smart Cards)
Changed the way paper money is used ATMs
Deposit $ Withdrawal Balance info
Debit Cards Home Banking Automatic Clearing House Stored Value Cards (Smart Cards)