2“Money is whatever is generally accepted in exchange for goods and services—accepted not as an object to be consumed but as an object that represents a temporary abode of purchasing power to be used for buying still other goods and services.”-- Milton Friedman
3Money liquid asset What is Money? __________is anything that is generally acceptable to sellers in exchange for goods and services.A __________ __________ is an asset that can easily (i.e., quickly, cheaply, conveniently) be exchanged for goods and services.liquidassetAn asset is any item of economic value owned by an individual or corporation which could be converted to cash.5
4Medium account value Payment What is Money?Functions of Money1) __________ of exchange2) Unit of __________3) Store of __________4) Standard of Deferred __________MediumaccountvalueMoney is any good that is widely used and accepted in transactions involving the transfer of goods and services from one person to another.Tell students that we will talk about each of these individually so that they can understand what they mean better.Payment6
5medium exchange Medium of Exchange (1) barter double wants The use of money as a __________ of __________(to make transactions) lowers transactions costs.Trade without money, directly exchanging goods for goods, is called __________.Barter requires a __________ __________ of __________—each party to the exchange has to want what the other has to trade.Finding someone else who wants what you have to trade and who has what you want is time-consuming and costly.exchangebarterdoublecoincidencewantsGood example of barter is during lunch when one person wants to exchange with another person what they are eating (i.e. bag of chips for a candy bar).However, if a person wants to trade their peanut butter and jelly sandwich, it may be hard to find someone else who is willing to barter with them.
6Widely payment Portable Medium of Exchange (2)A medium of exchange must be:__________ __________ for ____________________ : easy to transport and transfer to the seller__________ : measurable in both small and large unitsWidelyacceptedpaymentPortableDivisible
7Unit of Account Money acts as a common unit of measurement. This allows us to compare the values of very dissimilar things.It makes accounting possible.As a result of these things, it lowers information costs.
8Store of Value durable Inflation Money makes it possible to carry buying power forward into the future.Therefore, for money to be a store of value, it must be __________.__________ is the ability to retain value over time.__________ can reduce the effectiveness of money as a store of value.This can lead to __________ __________—the use of foreign money as a substitute for domestic money when the domestic economy has a high rate of inflation.durableDurabilityInflationcurrencysubstitution
9Standard of Deferred Payment Debt is denominated in money terms.The __________ for __________ is money.There is a difference between __________ and __________ :__________ is what you use to pay for goods and services.__________ is available savings that are lent to borrowers to spend.__________ is __________, something you owe.StandardrepaymentmoneycreditMoneyCreditCreditdebt
10M1 Money Supply Money in the United States Today consists of: Currency __________ is the bills and coins that we use.__________ are also money because they can be converted into currency and are used to settle debts.CurrencyDeposits12
11What is Money?—M1M1 is the narrowest and most liquid measure of the money supply.It includes financial assets that are immediately available for spending on goods and services.M1 includes:____________________ Checks__________ __________(checking accounts)Other __________ __________(interest-bearing checking)Demand Deposits and Checkable Deposits are called __________ __________ are checking accounts that can be drawn upon to make payments.CurrencyTravelers’Demanddepositscheckabledepositstransactionsaccounts
13About Currency In 2003, currency was 52% of M1. U.S. currency today is __________ backed by gold or silver.It is backed only by the confidence and trust of the public.It is a __________ monetary system. (“Fiducia” means “trust” in Latin.)Money backed by gold or silver (or something else of value) is called __________ __________.NOTfiduciarycommoditymoney
14Problems with Commodity Money At times, the precious metal in gold or silver coins may be worth more than the face value of the coins.In such situations, the public will begin to hoard the coins.
15What is Money?—M2addsM2 __________ to M1 less liquid assets that can be converted to M1 assets quickly and at low cost.Includes everything in M1Adds:__________ __________Small denomination time deposits (__________)Retail money market __________ __________SavingsDepositsCDsmutualfunds
18Financial Intermediaries __________ __________ are firms that take deposits from households and firms and make loans to other households and firms.FinancialIntermediaries21
19Financial Intermediaries Four Types of Financial Intermediaries1) __________ banks2) __________ and __________ __________3) __________ banks and __________ unions4) __________ __________ __________ __________CommercialSavingsLoanAssociationsSavingsCreditMoneyMarketMutualFunds22
20Financial Intermediaries Commercial banks__________ __________Financial institutions that offer deposits on which checks can be written. The make loans to households and businesses. They are corporations.Originally only commercial banks could offer (non-interest-bearing) checking accounts.Savings and Loan Associations, Credit Unions, Mutual Savings Banks.Created to encourage saving, hence “thrift”.Until 1980, these institutions could offer higher interest rates on savings accounts than banks.Now “thrifts” can offer many of the same services as commercial banks.Thrift institutions
22Federal Deposit Insurance Corporation A bank panic occurs when depositors, fearing a bank’s closing, rush to withdraw their funds.To reduce the likelihood of bank panics, in 1933 the __________ __________ __________ __________(FDIC) was created.This is a federal agency that insures bank deposits so that depositors do not lose their deposits if a bank fails.Federal Deposit Insurance Corporation
23Bank FailuresThe spike in bank failures in the late 80’s/early 90’s is due to the S&L failures.