STARTER HOW DOES THE VALUE OF MONEY AFFECT YOUR DAILY LIFE? LIST TYPES OF FINANCIAL INSTITUTIONS YOU KNOW

CHAPTER 10.1, 10.2 MONEY AND U.S. BANKING

WHY IS MONEY IMPORTANT? Money provides a low-cost method of trading one good or service for another. It makes the system of voluntary exchange efficient. 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 Barter--exchanging goods or services for other goods or services inefficient: both people must want what the other one has to exchange Money convenient: allows for precise and flexible pricing of products

FUNCTIONS OF MONEY Function 2: Standard of Value Money serves as a standard of value: measure of economic worth of goods, services in the exchange process In United States, the dollar is the standard of value of all products 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

TYPES OF MONEY Money derives value from one of three sources Commodity money--value based on the material from which it is made (Ex: Gold) Representative money--paper money backed by something tangible (Ex: Dollar based on Gold standard) Fiat money--declared by government to have value, accepted by citizens

MEASURING MONEY Most often cited instruments for measuring money are M1, M2 M1--currency, demand deposits, other checkable deposits - called liquid assets M2--M1, savings accounts, small time deposits, money market accounts

FINANCIAL INSTITUTIONS IN THE U.S.A. Bank: commercial banks, savings and loan associations, credit unions State, federal governments charter financial institutions, regulate: amount of money owners must invest in a bank size of reserves a bank must hold ways loans may be made Fractional Reserve Banking: percent of deposit banks must keep is set by Fed

FINANCIAL INSTITUTIONS IN THE U.S.A. Type 1: Commercial Banks Privately owned commercial banks are oldest type of banks initially created to provide business loans today, checking and savings accounts, loans, investments, credit cards All national, about 16 percent of state commercial banks belong to the Fed Customers can do 3 things: Store money Earn money Borrow money

FINANCIAL INSTITUTIONS IN THE U.S.A. Type 2: Savings Institutions S&Ls first chartered by states in 1830s took savings deposits; provided home mortgage loans today, provide many of same services as commercial banks Since 1933, federal government also charters S&Ls many federally chartered S&Ls call selves savings banks

FINANCIAL INSTITUTIONS IN THE U.S.A. Type 3 Credit Unions: 1909 first credit union chartered; 1934, federal system created offer savings and checking accounts; specialize in auto, mortgage loans deposits insured by National Credit Union Association (NCUA) Credit unions have membership requirements cooperatives: nonprofit organizations owned by, operated for members