1. Money and Banking

2. “Money is whatever is generally accepted in exchange for goods and services—accepted not as an object to be consumed but as an object that represents a temporary abode of purchasing power to be used for buying still other goods and services.”
-- Milton Friedman

3. Money liquid asset What is Money?
__________is anything that is generally acceptable to sellers in exchange for goods and services.
A __________ __________ is an asset that can easily (i.e., quickly, cheaply, conveniently) be exchanged for goods and services.
liquid
asset
An asset is any item of economic value owned by an individual or corporation which could be converted to cash. 5

4. Medium account value Payment
What is Money?
Functions of Money
1) __________ of exchange
2) Unit of __________
3) Store of __________
4) Standard of Deferred __________
Medium
account
value
Money is any good that is widely used and accepted in transactions involving the transfer of goods and services from one person to another.
Tell students that we will talk about each of these individually so that they can understand what they mean better.
Payment 6

5. medium exchange Medium of Exchange (1) barter double wants
The use of money as a __________ of __________(to make transactions) lowers transactions costs.
Trade without money, directly exchanging goods for goods, is called __________.
Barter requires a __________ __________ of __________—each party to the exchange has to want what the other has to trade.
Finding someone else who wants what you have to trade and who has what you want is time-consuming and costly.
exchange
barter
double
coincidence
wants
Good example of barter is during lunch when one person wants to exchange with another person what they are eating (i.e. bag of chips for a candy bar).
However, if a person wants to trade their peanut butter and jelly sandwich, it may be hard to find someone else who is willing to barter with them.

6. Widely payment Portable
Medium of Exchange (2)
A medium of exchange must be:
__________ __________ for __________
__________ : easy to transport and transfer to the seller
__________ : measurable in both small and large units
Widely
accepted
payment
Portable
Divisible

7. Unit of Account Money acts as a common unit of measurement.
This allows us to compare the values of very dissimilar things.
It makes accounting possible.
As a result of these things, it lowers information costs.

8. Store of Value durable Inflation
Money makes it possible to carry buying power forward into the future.
Therefore, for money to be a store of value, it must be __________.
__________ is the ability to retain value over time.
__________ can reduce the effectiveness of money as a store of value.
This can lead to __________ __________—the use of foreign money as a substitute for domestic money when the domestic economy has a high rate of inflation.
durable
Durability
Inflation
currency
substitution

9. Standard of Deferred Payment
Debt is denominated in money terms.
The __________ for __________ is money.
There is a difference between __________ and __________ :
__________ is what you use to pay for goods and services.
__________ is available savings that are lent to borrowers to spend.
__________ is __________, something you owe.
Standard
repayment
money
credit
Money
Credit
Credit
debt

10. M1 Money Supply Money in the United States Today consists of: Currency
__________ is the bills and coins that we use.
__________ are also money because they can be converted into currency and are used to settle debts.
Currency
Deposits 12

11. What is Money?—M1
M1 is the narrowest and most liquid measure of the money supply.
It includes financial assets that are immediately available for spending on goods and services.
M1 includes:
__________
__________ Checks
__________ __________(checking accounts)
Other __________ __________(interest-bearing checking)
Demand Deposits and Checkable Deposits are called __________ __________ are checking accounts that can be drawn upon to make payments.
Currency
Travelers’
Demand
deposits
checkable
deposits
transactions
accounts

12. U.S. Money Supply: M1 16

13. About Currency In 2003, currency was 52% of M1.
U.S. currency today is __________ backed by gold or silver.
It is backed only by the confidence and trust of the public.
It is a __________ monetary system. (“Fiducia” means “trust” in Latin.)
Money backed by gold or silver (or something else of value) is called __________ __________.
NOT
fiduciary
commodity
money

14. Problems with Commodity Money
At times, the precious metal in gold or silver coins may be worth more than the face value of the coins.
In such situations, the public will begin to hoard the coins.

15. What is Money?—M2
adds
M2 __________ to M1 less liquid assets that can be converted to M1 assets quickly and at low cost.
Includes everything in M1
Adds:
__________ __________
Small denomination time deposits (__________)
Retail money market __________ __________
Savings
Deposits
CDs
mutual
funds

16. U.S. Money Supply: M2

17. U.S. Money Supply: M3

18. Financial Intermediaries
__________ __________ are firms that take deposits from households and firms and make loans to other households and firms.
Financial
Intermediaries 21

19. Financial Intermediaries
Four Types of Financial Intermediaries
1) __________ banks
2) __________ and __________ __________
3) __________ banks and __________ unions
4) __________ __________ __________ __________
Commercial
Savings
Loan
Associations
Savings
Credit
Money
Market
Mutual
Funds 22

20. Financial Intermediaries
Commercial banks
__________ __________
Financial institutions that offer deposits on which checks can be written. The make loans to households and businesses. They are corporations.
Originally only commercial banks could offer (non-interest-bearing) checking accounts.
Savings and Loan Associations, Credit Unions, Mutual Savings Banks.
Created to encourage saving, hence “thrift”.
Until 1980, these institutions could offer higher interest rates on savings accounts than banks.
Now “thrifts” can offer many of the same services as commercial banks.
Thrift institutions

21. U.S. Depository Institutions

22. Federal Deposit Insurance Corporation
A bank panic occurs when depositors, fearing a bank’s closing, rush to withdraw their funds.
To reduce the likelihood of bank panics, in 1933 the __________ __________ __________ __________(FDIC) was created.
This is a federal agency that insures bank deposits so that depositors do not lose their deposits if a bank fails.
Federal Deposit Insurance Corporation

23. Bank Failures
The spike in bank failures in the late 80’s/early 90’s is due to the S&L failures.