1. Chapter 10
Money and Banking

2. Money: its functions and properties
Objectives
1. outline the functions that money performs and the characteristics that money possesses
2. explain why the different types of money have value
3. describe how the money supply in the United States is measured

3. Functions of money Money 3 important functions
Anything that people will accept as payment for goods and services
3 important functions
1. medium of exchange
2. standard of value
3. store of value

4. Function 1: medium of exchange
Money serves as a medium of exchange
Money provides a flexible, precise, and convenient way to exchange goods and services
Barter
Exchanging goods and services for other goods and services

5. Function 2: standard of value
Money also serves as a standard of value
Money provides both a way to express and measure the relative cost of goods and services and a way to compare the worth of different goods and services
Ex. a $20 t-shirt if worth two $10 phone cards, four $5 burritos, or twenty $1 bus rides

6. Function 3: store of value
Money act as a store of value
Money holds its value over time
People do not need to spend all of their money at once or in one place
Issue: inflation
A sustained rise in the general level of prices

7. Properties of Money
To perform the 3 functions of money, an item must possess certain physical and economic properties
Physical properties are the characteristics of the item itself
Economic properties are linked to the role that money plays in the market

8. Property 1: physical Durability Portability Divisibility Uniformity
Ability to last through many transactions
Lack of durability not a good item to use as money
Portability
Needs to be small, light, and easy to carry
Paper bills preferred over cattle
Divisibility
Dollar can be divided in multiple combinations of pennies, nickels, dimes, or quarters
Divisibility flexible pricing
Uniformity
Uniform features and markings that make it recognizable
Consistent size, special symbols, and printing techniques
Distinctive markings harder to counterfeit

9. Dollar bill analysis

10. Types of money Commodity money Representative money Fiat money
Has intrinsic value based on the material from which it is made
Representative money
Backed by something tangible
Fiat money
Declared by the government and accepted by citizens to have worth

11. Types 1: commodity of money
Something that has value for what it is
Items have value, aside from their value as money
Ex. gold, silver, precious stones, salt, olive oil valued for their scarcity and usefulness

12. Type 2: Representative money
Money that can be exchanged for something else of value
Middle Ages: Merchants began issuing receipts that promised to pay a certain amount of gold or silver
Not always safe to transport large sums of precious metals
Governments got involved by regulating how much metal was needed to be stored to back up paper money
Problems:
Representative money value fluctuates with supply and price of gold or silver
Inflation/deflation

13. Type 3: Fiat Money Fiat money
Only has value because the government has issued a fiat, or order, saying that this is the case
US dollar was linked to the value of gold until 1971
$10 bill cannot be exchanged for gold; only for other combinations of US currency equal to that $10
Fiat money (Coins)
Coins only contain a small amount of precious metals that is worth less than the face value of the coin
Fiat money has value because the government says it can be used as money and people accept that it will fulfill the function of money

14. Money in the us Currency Demand deposits Near money
Paper money and coins
Demand deposits
Checking accounts
Near money
Savings accounts and time deposits that can be converted into cash relatively easily

15. Money is the narrowest sense
Money is what can be immediately used for transactions (transactions money)
Demand deposits
Noninterest-bearing checking accounts that can be converted into currency simply by writing a check
Ex. traveler’s checks demand deposits

16. Are savings accounts money
Near money (savings accounts) and other interest bearing accounts cannot be used directly to make transactions
Cannot necessarily buy goods with a savings account passbook as payment
But money can be transferred easily from a savings account to a checking account in order to be used to buy a good
Other examples of near money
Time deposits funds people place in a financial institution for a specific time in return for a higher interest rate
Certificates of Deposits (CDs)
Money markets
Restrict number of transactions
Require a minimum balance in account in order to receive a higher rate of interest