Characteristics & Functions of Money

Characteristics of Money Any substance can serve as money if it has 4 characteristics Portability Durability Divisibility Scarcity

Portability Easily transferable from one person to another Makes exchange for products easier Current money lightweight, convenient, & can be transferred easily

Durability Does not deteriorate when handled Early money (musket balls) was very durable Fiat money can be replaced by new bills when it becomes worn Coins last 20 years, and a $1 bill circulates for 18 months

Divisibility Separated into smaller units so people can use only as much as the transaction requires Early money could be broken up or cut with a knife Coins allow us to divide a dollar, and checks can be written for exact amounts

Scarcity Money loses its value when too much is available In Colonial Virginia tobacco went from $0.36 per pound to $0.01 per pound when people began growing their own FED monitors amount of money in the market

Functions of Money Medium of Exchange – Accepted by all parties as payment Measure of Value – Shows worth of something Store of Value – Purchasing power can be saved between the time money is earned and spent.

Components of Money Federal Reserve Notes – paper currency Metallic coins issues by the U.S. Mint Demand Deposit Accounts – funds deposited in a bank that can be accessed by writing checks or using a debit card FED has 2 measures of money supply M1 – Coins, currency, checks, demand deposits, & traveler’s checks M2 – M1 plus savings deposits, time deposits, & money market funds

Components of Money These components make money more useful to us Coins make money more divisible Paper currency produced in higher denominations & is portable Checks can be written in exact amounts, & transfer even easier Electronic funds can be directly deposited which is simpler, less expensive, & more convenient