Economics Chapter 10 Section 1 Notes Money and Banking Economics Chapter 10 Section 1 Notes

What is Money? Anything people will accept as a medium of exchange over time, cattle, grain, metals, shells, other objects used as money

Functions of Money Function 1: Medium of Exchange Medium of exchange—means through which products can be exchanged Function 2: Standard of Value Money serves as a standard of value: measure of economic worth of goods, services in the exchange process Function 3: Store of Value Money acts as a store of value: holds its value over time can set aside for later use because will be accepted in future Does not function well as store of value when there is significant inflation

Properties of Money Property 1: Physical Durability—sturdy enough to last through many transactions Portability—small, light, easy to carry Divisibility—divisible so change can be made allows for flexible pricing Uniformity—distinctive features and markings make it recognizable

Properties of Money Property 2: Economic Stability of value—purchasing power should be relatively stable Scarcity—must be scarce to have any value Acceptability—users must agree that it is valid medium of exchange

Types of Money Type 1: Commodity Money Items have value in themselves apart from their value as money includes gold, precious stones, salt, olive oil; scarce or useful Coins most common; precious metal in them worth their face value If item becomes too valuable, people hoard, don’t circulate

Types of Money Type 2: Representative Money Can be exchanged for something else of value Beginnings in Middle Ages: people issued promises to pay in metal often unsafe or inconvenient to transport gold and silver Later, governments regulated amount stored of metal needed to back paper Value changes with metal supply, price; causes inflation, deflation

Types of Money Fiat Money Value based on government fiat, or order, saying the money has value Coins have token amount of precious metal; paper money has no intrinsic value Government maintains value by controlling supply—keeping it scarce EX: U.S. Currency

Money in the United States Are Savings Accounts Money? Near money cannot be used directly to make transactions Savings account: funds can be moved to checking account, withdrawn Time deposits: funds deposited for specific period to receive higher interest include certificates of deposit (CDs), money market accounts

Money in the United States How Much Money? Most often cited instruments for measuring money are M1, M2 M1—currency, demand deposits (checking accounts), other checkable deposits called liquid assets because they can become currency when withdrawn, etc. M2—M1, savings accounts, small time deposits, money market accounts

20th-Century Developments A New Central Bank 1913, Federal Reserve System created; consists of 12 regional banks, one decision-making board provides financial services to federal government makes loans to banks that serve the public issues Federal Reserve notes as national currency regulates money supply

Housing Boom and Bust From 2000 to 2006, house prices in the U.S. skyrocketed. Many factors contributed to this boom, but bank lending practices played a major role. Deregulation changed banks from local institutions into national megabanks. Instead of collecting payments on a mortgage for 30 years, banks began to sell these loans to other financial institutions for a quick profit.

Housing Boom and Bust Banks became less interested in verifying that clients could repay a mortgage and more interested in making as many mortgage loans as possible. The easy money fueled the housing price bubble.

Housing Boom and Bust What’s The Issue? How did bank lending practices contribute to the real estate boom? Study the sources on pages 312 – 313 of the text. Use the information to answer questions 1 - 3