1. Money, Banking, Saving and Investing
Economics
Chapter 8

2. Money and Banking Objective: Agenda: CBM #4 (Ch 7-8)
Oral Presentations Market Structures
Chapter 8 ppt + Notes
Exit Activity – Origins of Money
SWBT identify the roles of money, banking, and financial institutions in the U.S. economy

3. Grandma Imagine your Grandma gives you $5,000!
What would you choose to do with your money? Why?
What other options would you consider?
In the long term, do you think this would be the wisest choice?
Throughout life, you will face many decisions about your finances – everyday!
Understanding the basic rules of spending, saving and investing will help you make wise choices.

4. How do these words help you answer the question:
Bank
Asset
Credit card
Debit card
Saving
Interest
Principal
Investing
Diversification
How do these words help you answer the question:
“How should you spend, save and invest your money?”
At the end of our lesson look back and see if your definitions are correct

5. Red Paper Clip http://www.youtube.com/watch?v=BE8b02EdZvw
Did Kyle MacDonald use
“money” to get his house?
8 minutes

6. What Makes Money…Money?
Money – anything that is generally accepted as a means of payment
3 Functions of Money:
Medium of Exchange – legal tender
Standard of Value (one scale – US$)
Store of Value – holds its value over
time -- purchasing power (quantity
of goods and services that can be
bought with a particular sum of money)
Economists define money as anything that is generally accepted as payment
Did MacDonald use money? – maybe, but he relied on coincidence and publicity to get what he wanted
With what we traditionally believe to be money, producers will gladly accept it in exchange for goods and services
Economists describe money according to its main functions and characteristics
Medium of exchange – enables us to carry out trade and commerce easily
Ex: rather than trying to find someone to accept a dozen pair of flip flops for a backpack, you can hand the clerk a quantity of dollars
Dollars are the established medium of exchange in the US – legal tender – they must be accepted as money for purchases and as payment of debt.
I can’t refuse dollars and only accept pesos or euros
Standard of Value: allows us to measure and compare the value of goods and services using one scale – dollars
Ex: image two stores advertisements – one store advertises a backpack for 9 pairs of flip flops, the other for 5 T-shirts
Without a standard of value, how do you know which backpack costs more?
Store of Value – holds value over time – banana is a poor store of value because it spoils quickly – rotten bananas have lost most of their original value
Money holds its value over time – purchasing power – quantity of goods and services that can be bought with a particular sum of money
Ex: you have $5 in your pocket, it will buy $5 worth of goods and services today, as well as tomorrow
You will always be able to buy $5 worth of pencils – the number of pencils $5 buys might change

7. Money Has 6 Main Characteristics
Throughout the ancient Mediterranean, traders accepted salt as a medium of exchange
Roman soldiers received salt as their salarium -- salary
Acceptability
As we talk about these characteristics, think about how they apply to a substance that was widely accepted as money in the ancient world – Salt
1. Acceptability – in order to buy something, a seller must be willing to accept what you offer as payment

8. Money Has 6 Main Characteristics
In the ancient world, salt was scarce in most places – yet demand was great
Preserved food
Used in religious ceremonies
Scarcity made it valuable
Traded equally with gold in Africa
Scarcity
Whatever is used as money needs to be scarce enough to be valued by buyers and sellers
Many cultures have used gold and silver as a medium of exchange – scarcity of metals adds to their value

9. Money Has 6 Main Characteristics
Salt is portable to some extent
Imagine lugging several large bags of salt to the mall
How messy is it to buy a pair of jeans for three cups of salt?
Portability
To be convenient money must be portable – coins and bills
Salt fails the portability test today, but was easy and light to carry in the ancient world

10. Money Has 6 Main Characteristics
In the ancient world (and today) salt can last a long time – but only if kept dry
How would you feel if a rainstorm washed away your fortune?
Durability
Durability – for money to be a store of value it must be durable – withstand physical wear and tear
Transferred from person to person
Salt fails the durability test

11. Money Has 6 Main Characteristics
Divisibility
A bag of salt can be easily split into smaller parts
This divisibility made it useful medium of exchange
To be useful as a medium of exchange , money must be easily dividable into smaller amounts
Imagine an economy that uses glass bowls as a medium of exchange
Buyers in that economy would be unable to buy anything worth less than a glass bowl, because the seller would be unable to provide change – broken shards of glass would be too dangerous to use

12. Money Has 6 Main Characteristics
Uniformity
Like dollar bills, in the ancient world, all salt was pretty much the same
A dollar is a dollar is a dollar
Consider an economy where the pumpkin is the medium of exchange
Pumpkins come in all sizes – could large pumpkins be exchanged for more goods than small pumpkins?
How would producers and consumers agree on the value of a pumpkin?
Historically, salt had most of the characteristics of a useful medium of exchange – not so much today.

13. A Brief History of Money
Commodity Money – gold, silver, salt, tobacco, cattle – goods that had value in trade
Bank: a business that receives deposits and makes loans
Commodity money was used for thousands of years all around the world
Precious metals have been the most preferred
During the Renaissance in Europe merchants needed a safe place to store their gold and silver – developed Banks
Loan: transaction in which a lender gives money to a borrower who agrees to pay it back

14. A Brief History of Money
Commodity Backed Money –
banknotes given in exchange
for gold and silver
Banknotes – forerunners of printed money issued by governments
Paper Money today is no longer backed by gold or silver – now its called fiat money (based on govt regulation or law)
US Dollars are backed by the full faith and credit of the US Government

16. What Counts as Money Today?
Currency – bills and coins circulating throughout the economy
What else counts as money? -- Assets
Liquid assets – anything that can be easily converted to cash
Checkable deposits – deposits in checking accounts
Travelers Checks – not
used much anymore
When I say money, what do you think of ???? CASH – another world for currency
Asset – anything owned that a market assigns value to
Liquid assets – easily convertible, like stocks and bonds, foreign currency
Checks are not money – they are instructions to a bank to pay money to someone – the deposits they access are money – checkable deposits

17. What Else Counts As Money?
Are savings accounts considered money?
No, it is “near money” not used to directly buy things
Are Credit Cards Money?
No, credit is an arrangement that allows
you to buy now with borrowed “money”
but pay later
Are Debit Cards Money?
No, they are similar to checks, they instruct a bank who to pay

18. Exit Ticket
Using your class notes, complete the handout on The Origins of Money
List and define the 3 functions of money
Then consider former mediums of exchange and analyze each in terms of how well it functions as money

19. Complete the Diagram and hand it in
Exit Ticket:
Complete the Diagram and hand it in