Money EQ: What role do Money and Banks play in a modern economy? Money Commodity Money Representative Money Fiat Money E. Napp

Standards Content Standard 5: The student will describe the role of economic institutions including banks, labor unions, corporations, governments, and not-for-profits in a market economy. 1. Evaluate the impact of government ensuring the protection of private property rights and the rule of law in a market economy. 2. Describe how banks match savers with borrowers and allow people to pool their incomes and provide future income through investing in stocks. 3. Identify how labor unions, corporations, and not-for profits influence a market economy. Content Standard 6: The student will analyze how money makes it easier to trade, borrow, save, invest, and compare the value of goods and services. 1. Explain how individuals, businesses and the overall economy benefit from using and saving money. 2. Identify the components of the money supply, the different functions of money, and give examples of each. 3. Explain how the value of money is determined by the goods and services it can buy. Content Standard 7: The student will evaluate how interest rates impact decisions in the market economy. 1. Analyze the relationship between interest rates and inflation rates. 2. Determine how changes in real interest rates impact people’s decisions to borrow money and purchase goods in a market economy. E. Napp

We use it every day but what is money? E. Napp

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? E. Napp

When we purchase a sweater, we use money as a medium of exchange. E. Napp

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. E. Napp

An expensive price tag tells us something about the good’s value. E. Napp

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. E. Napp

But I don’t have to tell you about inflation. You know all about rising prices. You’ve been to the gas station. E. Napp

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. E. Napp

Long ago, in some societies, salt was used as money. Salt is an example of commodity money. Salt can be used as money or eaten. E. Napp

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. E. Napp

Our dollars were once backed by gold. You could exchange a dollar for gold. E. Napp

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. E. Napp

Its money because the government says so. Its fiat money. E. Napp

Six Characteristics of Money Do we use pigs as money or paper as money? How does a society decide? 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. E. Napp

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? E. Napp

The History of American Banking In this lesson, students will identify critical periods in the history of American banking. Students will be able to identify and/or define the following terms: Bank Federalists Anti-Federalists Federal Reserve Bank E. Napp

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

Today, the Federal Reserve Bank oversees banking in the United States. It was not always this way. E. Napp

There was a time when banks were not regulated by the Federal government. Sometimes bankers made poor decisions that bankrupted their banks. E. Napp

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. E. Napp

Federalists, like Alexander Hamilton, believed that a strong, central bank was essential for the new nation. A strong, central bank could prevent abuses in banking. E. Napp

Anti-federalists, like Patrick Henry, believed that a strong, central bank would have too much power. Wasn’t the revolution about limiting the power of the government? E. Napp

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. E. Napp

You see, banks make money by loaning money. However, if banks loan money to people who cannot repay their loans, then banks lose money. E. Napp

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. E. Napp

In the case of banking, the Federalists may have been right. A central bank does prevent abuses in banking. E. Napp

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. E. Napp

The Fed monitors banking in every part of the United States. E. Napp

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? E. Napp

Banking Today In this lesson, students will be able to identify important terms concerning banking. Students will be able to identify and/or define the following terms: M1 and M2 Principal Interest Default E. Napp

The money supply is all the money available in the United States. E. Napp

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. E. Napp

Checks are examples of M1. M1 has liquidity. Liquidity means it can be used easily as money. E. Napp

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. E. Napp

A bond must be converted to cash before it can be used. E. Napp

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. E. Napp

Interest is the price of borrowed money. E. Napp

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. E. Napp

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

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. E. Napp

A mortgage is a loan on real estate. E. Napp

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

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? E. Napp