1. Introduction to Money What exactly is money?

2. MONEY Money- anything used to facilitate the exchange of goods & services between buyers and sellers

3. 3 Functions of Money Medium of exchange Unit of account (or standard of value) Store of value anything that is readily acceptable as payment The yardstick people use to post prices and record debts Any item that people can use to transfer purchasing power from the present to the future

4. 2 Kinds of Money Commodity money takes the form of a commodity with intrinsic value –Examples: Gold, silver, cigarettes Fiat money is used because of Government decree –It does not have intrinsic value –Examples : Coins, currency, check deposits –U.S. money is not backed by anything!

5. Liquidity Liquidity is the ease with which an asset can be converted into currency U.S. financial markets are the most liquid in the world –During the financial crisis subprime mortgages lost all liquidity

6. Money in the U.S. Economy Currency in the form of paper bills & coins Demand deposits- balances in bank accounts that can be accessed “on demand” by writing a check –Savings accounts are not considered demand deposits Money Supply- total money in the financial system. It is measured 3 ways known as M1, M2 & M3

7. Measures of Money Stock Billions of Dollars Currency ($699 billion) Demand deposits Traveler’s checks Other checkable deposits ($664 billion) Everything in M1 ($1,363 billion) Savings deposits Small time deposits Money market mutual funds A few minor categories ($5,035 billion) 0 M1 $1,363 M2 $6,398

8. Money Supply M1 - most liquid M2 - slightly less liquid M3 = M2 + large time deposits (over $100,000) –Less liquid than M2 (bank CD’s) At any given time, the supply of money is fixed The Federal Reserve regulates the quantity of money

9. Where Is All The Currency? 2004: $699 billion of U.S. currency outstanding –$3,134 in currency per adult Who has all this currency? –held abroad –held by illegal entities

10. Money Worksheet