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

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

4. 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

5. 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

6. 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

7. 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

8. 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

9. 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

10. 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Savings account: funds can be moved to checking account, withdrawn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

11. 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

14. 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

16. 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.

17. 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.

18. 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
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