1. Characteristics & Functions of Money

2. Characteristics of Money
Any substance can serve as money if it has 4 characteristics
Portability
Durability
Divisibility
Scarcity

3. Portability Easily transferable from one person to another
Makes exchange for products easier
Current money lightweight, convenient, & can be transferred easily

4. Durability Does not deteriorate when handled
Early money (musket balls) was very durable
Fiat money can be replaced by new bills when it becomes worn
Coins last 20 years, and a $1 bill circulates for 18 months

5. Divisibility
Separated into smaller units so people can use only as much as the transaction requires
Early money could be broken up or cut with a knife
Coins allow us to divide a dollar, and checks can be written for exact amounts

6. Scarcity Money loses its value when too much is available
In Colonial Virginia tobacco went from $0.36 per pound to $0.01 per pound when people began growing their own
FED monitors amount of money in the market

7. Functions of Money
Medium of Exchange – Accepted by all parties as payment
Measure of Value – Shows worth of something
Store of Value – Purchasing power can be saved between the time money is earned and spent.

8. Components of Money Federal Reserve Notes – paper currency
Metallic coins issues by the U.S. Mint
Demand Deposit Accounts – funds deposited in a bank that can be accessed by writing checks or using a debit card
FED has 2 measures of money supply
M1 – Coins, currency, checks, demand deposits, & traveler’s checks
M2 – M1 plus savings deposits, time deposits, & money market funds

9. Components of Money These components make money more useful to us
Coins make money more divisible
Paper currency produced in higher denominations & is portable
Checks can be written in exact amounts, & transfer even easier
Electronic funds can be directly deposited which is simpler, less expensive, & more convenient