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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
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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
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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
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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
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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
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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
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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
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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
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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?
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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
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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”
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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)
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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
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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
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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
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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)
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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
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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
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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
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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
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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
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Interest - price paid for borrowed money Principal - amount borrowed Two Types Simple interest- paid only on principal $100 + 5% = $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 $100 + 5% = $105 Compound interest - pays on both principal and interest accumulated
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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
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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
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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)
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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
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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
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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)
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