CHAPTER 10.1 MONEY Three uses of $ 6 Characteristics of $ Source of $’s value MONEY Three uses of $ 6 Characteristics of $ Source of $’s value

Three uses of Money  Money?  Anything that serves as a medium of exchange, a unit of account, and a store of value  1. Medium of exchange  Determines the value during the exchange of goods and services  Bartering - direct exchange of one set of goods/ services for another  Money?  Anything that serves as a medium of exchange, a unit of account, and a store of value  1. Medium of exchange  Determines the value during the exchange of goods and services  Bartering - direct exchange of one set of goods/ services for another

 Still used today all over the world  Becomes impractical as an economy grows  Easier to use money than bartering  No agreements necessary  Still used today all over the world  Becomes impractical as an economy grows  Easier to use money than bartering  No agreements necessary

 2. Unit of account  A way to compare value of goods and services  3. Store of value  Keeps its value if it is stored rather than used  No expiration date  *Inflation* - general increases in prices  2. Unit of account  A way to compare value of goods and services  3. Store of value  Keeps its value if it is stored rather than used  No expiration date  *Inflation* - general increases in prices

6 Characteristics of Money  Anything can be used as money  Cattle, salt, gold, dried fish, furs, porpoise teeth, tulip bulbs  1. Durability  Must withstand physical wear and tear  $1 lasts about a year in circulation  Easily replaced  Anything can be used as money  Cattle, salt, gold, dried fish, furs, porpoise teeth, tulip bulbs  1. Durability  Must withstand physical wear and tear  $1 lasts about a year in circulation  Easily replaced

 2. Portability  Must be able to conduct daily business with it  Easily transferred from one person to another  3. Divisibility  Useful if it can be easily divided  2. Portability  Must be able to conduct daily business with it  Easily transferred from one person to another  3. Divisibility  Useful if it can be easily divided

 4. Uniformity  Must be able to count and measure accurately  5. Limited supply  Federal Reserve controls the supply of money in circulation  4. Uniformity  Must be able to count and measure accurately  5. Limited supply  Federal Reserve controls the supply of money in circulation

 6. Acceptability  Must be able to use it anywhere  Sudden loss of confidence will deflate the value  Euro = 1.37 USD  6. Acceptability  Must be able to use it anywhere  Sudden loss of confidence will deflate the value  Euro = 1.37 USD

Where does money get its value?  3 types of money 1.Commodity Money Objects that have value themselves Salt, Cattle, precious stones Have a value other than money Disadvantages?  3 types of money 1.Commodity Money Objects that have value themselves Salt, Cattle, precious stones Have a value other than money Disadvantages?

 2. Representative Money  Holder can use it for something else  IOU  Paper receipts for gold or silver  Bills of credit  2. Representative Money  Holder can use it for something else  IOU  Paper receipts for gold or silver  Bills of credit

 3. Fiat Money  Money that holds value because the government says so  Our money  Fed controls supply, govt says money has value so it is “legal tender”  3. Fiat Money  Money that holds value because the government says so  Our money  Fed controls supply, govt says money has value so it is “legal tender”

10.2  Federal Deposit Insurance Corporation  (FDIC)  Govt agency that insures customer deposits if a bank fails  Covered up to $250,000 (2013)  Federal Deposit Insurance Corporation  (FDIC)  Govt agency that insures customer deposits if a bank fails  Covered up to $250,000 (2013)

10.3 Banking Today  How is money supply measured  Services banks provide  Types of financial institutions  How is money supply measured  Services banks provide  Types of financial institutions

Money Supply  All of the money available in the US economy  M1 - Money immediately available  All assets that have liquidity  Used as or directly converted to cash  All the money not in bank vaults  Money in checking accounts  Demand deposits  Travelers checks  All of the money available in the US economy  M1 - Money immediately available  All assets that have liquidity  Used as or directly converted to cash  All the money not in bank vaults  Money in checking accounts  Demand deposits  Travelers checks

 M2 - all the money in M1 + additional assets  Saving Accounts  Can’t be used as cash  Money Market Mutual Funds  Money pooled together that is used to buy short term securities  M2 - all the money in M1 + additional assets  Saving Accounts  Can’t be used as cash  Money Market Mutual Funds  Money pooled together that is used to buy short term securities

Banks  Services Banks offer  1. Storing money  Safe convenient place to keep money  Insured against robbery  Federal Deposit Insurance Corporation (FDIC)  Covers accounts up to $250,000 (2013)  Services Banks offer  1. Storing money  Safe convenient place to keep money  Insured against robbery  Federal Deposit Insurance Corporation (FDIC)  Covers accounts up to $250,000 (2013)

 2. Saving Money  Savings Accounts  Checking Accounts  Most common  Good for frequent withdrawals  Small interest rates annually  2. Saving Money  Savings Accounts  Checking Accounts  Most common  Good for frequent withdrawals  Small interest rates annually

 Money Market Account  Allows a certain amount of checks written  Interest can go up or down (Variable)  Certificates of Deposit (CD’s)  Guaranteed amount of interest over a specific time period  Money cannot be used until time period is over  Penalties for removal  Money Market Account  Allows a certain amount of checks written  Interest can go up or down (Variable)  Certificates of Deposit (CD’s)  Guaranteed amount of interest over a specific time period  Money cannot be used until time period is over  Penalties for removal

 3. Loans  Fractional reserve banking  Banking system that keeps only a fraction of funds on hand, lends out the rest  More it lends out, more money they make  Business, car, home improvement, college, personal  Default  3. Loans  Fractional reserve banking  Banking system that keeps only a fraction of funds on hand, lends out the rest  More it lends out, more money they make  Business, car, home improvement, college, personal  Default

 4. Mortgages -  Used specifically for real estate  15, 20, 25 years or longer  Credit check,  Can determine your rate and length  4. Mortgages -  Used specifically for real estate  15, 20, 25 years or longer  Credit check,  Can determine your rate and length

 5. Credit Cards  Issued by banks to individuals with promise to pay back with interest  Better credit will increase your spending limit  5. Credit Cards  Issued by banks to individuals with promise to pay back with interest  Better credit will increase your spending limit

 Interest - price paid for borrowed money  Principal - amount borrowed  Two Types  Simple interest- paid only on principal  $ % = $105  Compound interest - pays on both principal and interest accumulated  Interest - price paid for borrowed money  Principal - amount borrowed  Two Types  Simple interest- paid only on principal  $ % = $105  Compound interest - pays on both principal and interest accumulated

Types of Financial Institutions  1. Commercial Banks  Usually work with businesses  Checking Accounts  Accept deposits  Some are regulated by States  1/3 are national banks part of the Fed Res  Play the biggest roles in our economy  1. Commercial Banks  Usually work with businesses  Checking Accounts  Accept deposits  Some are regulated by States  1/3 are national banks part of the Fed Res  Play the biggest roles in our economy

 2. Savings and Loans (S&L’s)  Originally established aid in home building  Save money in an account until you have enough to buy a home  Now offer many of the same functions as other banks  2. Savings and Loans (S&L’s)  Originally established aid in home building  Save money in an account until you have enough to buy a home  Now offer many of the same functions as other banks

 3. Savings Banks  Started for people who made smaller deposits than big companies  Owned by those who deposited money  Shared the profits  Turned to selling stocks  Started the first checking accounts that paid interest  Negotiable Order of Withdrawal (NOW)  3. Savings Banks  Started for people who made smaller deposits than big companies  Owned by those who deposited money  Shared the profits  Turned to selling stocks  Started the first checking accounts that paid interest  Negotiable Order of Withdrawal (NOW)

 4. Credit Unions  Cooperative lending institutions  Particular groups  Fairly small  Specialize in types of loans  Better rates for members  4. Credit Unions  Cooperative lending institutions  Particular groups  Fairly small  Specialize in types of loans  Better rates for members

 5. Finance Companies  Make installment loans  Spread costs over a number of months  Usually higher interest rates vs banks  5. Finance Companies  Make installment loans  Spread costs over a number of months  Usually higher interest rates vs banks

Electronic Banking  Changed the way paper money is used  ATMs  Deposit $  Withdrawal  Balance info  Debit Cards  Home Banking  Automatic Clearing House  Stored Value Cards (Smart Cards)  Changed the way paper money is used  ATMs  Deposit $  Withdrawal  Balance info  Debit Cards  Home Banking  Automatic Clearing House  Stored Value Cards (Smart Cards)