Economics

MoneyMoney

Commodity MoneyRepresentative Money

Fiat Money

Economics

We use it every day but what is money?

Economics

Money

• Money is a medium of exchange, a unit of account, and a store of value.

• As a medium of exchange, money measures value during the exchange of goods and services.

• What is the value of a sweater?

Economics

Money, Again

• As a unit of account, money is a way to compare the value of goods and services.

• A more expensive sweater is considered more valuable than a cheaper sweater.

• Finally, money is a store of value. Money holds its value even if it is not used though inflation affects money.

Economics

And if we don’t spend it today, that’s O.K., too. Money is a store of value. It keeps its value unless inflation occurs.

But I don’t have to tell you aboutinflation. You know all about rising prices.

Economics

Not All Money is the Same

• Commodity money can be used as money but also has value in itself.

• An example of commodity money is salt. Salt was once used in some societies as money.

• Salt could be used as money or eaten.

Economics

Representative Money

• Representative money is another type of money.

• An example of representative money is an I.O.U.

• The paper that the I.O.U. is written on can be exchanged for something valuable.

Economics

Our dollarswere oncebacked bygold. You

could exchange a

dollar for gold.

Economics

Fiat Money

• Fiat money is our money today.

• Our money is money because the government states that it is an acceptable means to pay debts.

• In other words, its money because the government says so.

Economics

Six Characteristics of Money

• There are six characteristics of good money. Money should be portable, divisible, durable, uniform, accepted, and have a limited supply.

• Too much money in circulation means less value.

Economics

Questions for Reflection:

• What is money?• Explain each of the three functions of

money.• Provide an example of commodity money.• What is representative money?• How does fiat money differ from

commodity money and representative money?

Economics

The History of American Banking

BankFederalists

Anti-FederalistsFederal Reserve Bank

Economics

A bank is an institution for receiving,keeping, and lending money.

Economics

Today, the Federal Reserve Bank overseesbanking in the United States. It was not

always this way.

Economics

There was a time when banks were notregulated by the Federal government.

Sometimes bankers made poor decisionsthat bankrupted their banks.

Economics

Federalists vs. Anti-Federalists

• At the founding of the nation, Federalists wanted a strong, central bank.

• Anti-Federalists did not. Anti-Federalists believed that a strong, central bank would only loan to the rich and powerful.

• Federalists and Anti-Federalist just didn’t agree.

Economics

Then There Was None

• Sometimes the Anti-Federalists won.

• Whenever a central bank was lacking, there was frequently chaos in banking. Banks often made too many bad loans.

• When enough people defaulted or did not pay back their loans, the banks went bankrupt.

Economics

You see, banksmake money byloaning money.

However, if banksloan money topeople who cannot repaytheir loans,

then banks losemoney.

Economics

The Federal Reserve Bank• Eventually, it became clear that the nation

needed a strong, central bank to oversee banking in America.

• A strong central bank could monitor banking in the country and make sure that banks did not make too many loans.

• A strong, central bank could hold bankers to higher standards thereby protecting consumers.

Economics

The Fed

• The Federal Reserve Bank is commonly referred to as the “Fed.”

• The Federal Reserve Bank can make loans to banks, raise or lower interest rates, and require banks to hold adequate reserves.

• The Fed helps banks across America.

Economics

The Fed monitors banking in every partof the United States.

Economics

Questions for Reflection:

• What is a bank?• What was the primary difference between

the Federalist party and the Anti-Federalists?

• Why did chaos occur in banking when a strong, central bank did not exist in the country?

• What is the Federal Reserve Bank?

Economics

Banking TodayM1 and M2

PrincipalInterestDefault

Economics

The money supply is all the moneyavailable in the United States.

Economics

M1

• The money supply consists of M1 and M2.

• M1 is money that people can easily use to pay for goods and services.

• Cash and checks are examples of M1.

Economics

Checks are examples of M1. M1 hasliquidity. Liquidity means it can be

used easily as money.

Economics

M2

• M2 consists of M1 and several other assets.

• M2 includes savings accounts and mutual funds.

• These assets must be converted to cash before they are used.

Economics

A bond must be converted to cashbefore it can be used.

Economics

Interest

• When money is deposited in a bank, the customer receives interest on the money.

• A person who borrows money must pay interest.

• Interest is the price of borrowed money.

Economics

Default

• When a person fails to pay back a loan, he has defaulted on the loan.

• Defaulting on a loan leads to bad credit and higher interest rates in the future.

• By defaulting, a person ruins his reputation for repaying a loan.

Economics

Defaulting on a loan leads to bad creditand higher interest rates in the future.

Economics

Principal and Interest

• There are two parts to any loan: principal and interest.

• The principal is the actual amount borrowed.

• The interest is the money a customer pays above the principal for the opportunity to borrow money.

A mortgage is a loan on real estate.

Economics

By learning the language of banking,a person makes better choices.

Economics

Questions for Reflection:

• What is the money supply?• How does M1 differ from M2?• Provide an example of an object that has

liquidity.• Why does it harm a person to default on a

loan?• What does a loan consist of?• How does principal differ from interest?