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Money and Banking. Money is whatever is generally accepted in exchange for goods and servicesaccepted not as an object to be consumed but as an object.

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Presentation on theme: "Money and Banking. Money is whatever is generally accepted in exchange for goods and servicesaccepted not as an object to be consumed but as an object."— Presentation transcript:

1 Money and Banking

2 Money is whatever is generally accepted in exchange for goods and servicesaccepted 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

3 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.

4 What is Money? Functions of Money 1) __________ of exchange 2) Unit of __________ 3) Store of __________ 4) Standard of Deferred __________

5 Medium of Exchange (1) 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.

6 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 units

7 Unit 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.

8 Store of Value 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.

9 Standard 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.

10 M1 Money Supply Money in the United States Today consists of: – __________ is the bills and coins that we use. – __________ are also money because they can be converted into currency and are used to settle debts.

11 What is Money?M1 M1 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.

12 U.S. Money Supply: M1

13 About 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 __________ __________.

14 Problems 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.

15 What is Money?M2 M2 __________ to M1 less liquid assets that can be converted to M1 assets quickly and at low cost. Includes everything in M1 Adds: – __________ __________ – Small denomination time deposits (__________) – Retail money market __________ __________

16 U.S. Money Supply: M2

17 U.S. Money Supply: M3

18 Financial Intermediaries __________ __________ are firms that take deposits from households and firms and make loans to other households and firms.

19 Financial Intermediaries Four Types of Financial Intermediaries 1) __________ banks 2) __________ and __________ __________ 3) __________ banks and __________ unions 4) __________ __________ __________ __________

20 Financial Intermediaries __________ __________ – 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.

21 U.S. Depository Institutions

22 Deposit Insurance A bank panic occurs when depositors, fearing a banks 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.

23 Bank Failures


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