Money Supply, Credit and Interest Rates Economics Chapter 10 section 2

Review Origins/Functions of Money “Quickwrite” – What gives money its value? What are the three functions of money? What gives money its value? – General acceptability People accept it and you know you can use it to get what you want What are the three functions of money? – Medium of exchange – Unit of account – Store of value

Readers Theatre Today’s Production is: “Money Supply” Need 5 readers – front of classroom Follow along with the class script You will be able to answer questions from study guide following the production

Money Supply What Are the Components of the Money Supply? – (M1) money supply is the total supply of money in circulation. It is composed of currency (coins and paper money), checking accounts, and traveler’s checks.

Savings Account Savings account = interest earning account maintained by a financial institution – Savings accounts are considered “near-money”: anything that can be relatively easily and quickly turned into money

Credit Cards are not Money Credit cards are not considered money. – When you are paying with a credit card you are making a promise to pay for something. You haven’t actually paid for it. Checks and debit cards are considered the same as money. – They are taken from an account of money in a bank.

Credit – The Three C’s Receive money today with a promise to repay in the future – this is credit – Character : reputation, credit history, job stability – Capacity: Are you able to repay the debt based on your income? – Collateral: Property used to secure the loan

Credit Types of Credit – Home loans – Car loans – Business loans – Student loans – Credit cards

Credit What are 3 responsible uses of credit? – paying off your balance each month – building your credit rating to qualify for a lower mortgage – finding the credit card with the lowest APR and best incentives

Credit Cards Read “Psychology of Credit Cards” page in class textbook – Financial Responsibility

Interest Rates Interest Rate: The amount the borrower has to pay in order to take out a loan. – This is how banks make money – Ex: You borrow $100 and the bank charges 5% interest on your loan. You would then owe $105. The principal (the amount you borrowed) plus interest.

Interest Rates When a loan is given out, you have someone who is the borrower and someone who is a lender… Typically the individual taking out the loan is the borrower and the bank is the lender. Interest rates in the US have varied throughout the years – Ex: When you go to purchase your first house, most likely you will go through a bank to take out a loan. In this scenario, you become the borrower and the bank is the lender

Interest Rates Supply and Demand determine interest rates – Increase in demand for loans while supply stays the same means higher interest rates – Decrease in demand while supply stays the same results in a lower interest rate – When supply of loans decreases, the price of loans increase – When the supply of loans increases and demand stays the same, the price of loans fall – When interest rates fall (get cheaper) consumers are more likely to borrow more and save less