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Money and Banking. The Functions and Characteristics of Money.

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Presentation on theme: "Money and Banking. The Functions and Characteristics of Money."— Presentation transcript:

1 Money and Banking

2 The Functions and Characteristics of Money

3  Medium of Exchange  Something a seller will accept in exchange for a product or service.  Without money, people would have to barter, a much more complicated process involving a double coincidence of wants.  Unit of Accounting  It is used to measure and compare the values of different items and services.  Helps to keep accurate financial records

4  Store of Value  It is used as a store of value—sell one thing (such as labor) and save its value (paycheck) for use at a later time.

5  Any item that wants to be money must meet six criteria:  Durable—withstands wear and tear of being passed around  Portable—must be easy to transport  Divisible—must be able to divide it into small parts in order to purchase things of differing value  Must have stable value  Must be a scarce item so that there is not too much of it.  Must be accepted by the sellers and buyers in community

6  Commodity Money : a medium of exchange such as cattle or gems that has value as a commodity or good aside from its value as money  Cattle are used for food; gems are used for jewelry.  Representative Money : money that is backed by an item of value such as by gold or silver  The amount of money in ciruculation would be limited because it is linked to some scarce good, such as gold.

7  Fiat Money : money that has value because a government fiat, or order, has established it as acceptable for payment of debts  Today, all US money is fiat money and is declared legal tender.  Legal Tender : money that by law must be accepted for payment of public and private debts

8 History of American Money and Banking

9  England forbade Colonial America from using printed money or minted coins.  Bartering of various goods was used in place of money.  When the war came, the Continental Congress issued bills of credit (Continentals) to pay war debts.

10  Too many Continentals were issued and they became worthless.  After the war, the United States began to mint its own coins backed by gold and silver.

11  Checking accounts  Automatic deposit and payment  Storage of valuables  Money transfers  Overdraft checking, which allows a customer to write a check for money that is in the account and the bank will loan the money to be paid back at a high interest rate.

12  Computers ushered in a new form of banking—electronic fund transfers (EFT)  Automated teller machines (ATMs)  Lack of privacy and possibility of tampering are risks of electronic bank transfers.

13  Customer has little “float” time between writing the check and its being cashed by the bank.  Electronic Funds Transfer Act helped calm some of these concerns.

14 Types of Money in the United States

15  Currency  Coins and bills (notes)  Federal Reserve Notes and United States Notes are legal tender.  Credit Cards and Debit Cards  Credit cards are not really money; they are representative of future claims to funds.  Credit cards actually defer the completion of the transaction to a later date.  Debit cards are similar to checks, but the withdrawal is done electronically.

16  Checks  Checks and checking accounts offer checkable deposits.  Today all thrift institutions offer checkable deposits.  Checking Account : account in which deposited money can be withdrawn at any time by writing a check  Checkable Deposits : money deposited in a bank that can be withdrawn at any time by presenting a check.  Thrift Institutions : mutual savings banks, S&Ls, and credit unions that offer many of the same services as commercial banks

17  Near Moneys  Near Moneys : assets, such as savings accounts, that can be turned into money relatively easily and without the risk of loss of value  Near moneys are assets that have values stated in terms of money, but are not themselves money.  Near money can easily be turned into money, such as savings accounts or time deposits.

18  Definition M1 includes:  all currency,  all deposits in checking accounts,  and travelers’ checks.

19  Definition M2 includes:  all of M1 plus savings deposits,  Time deposits,  small denomination CD’s,  money market deposit accounts,  money market mutual fund balances,  And other specialized account balances.

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