TAKE A GUESS What is the definition of money? Answer T/F 1. The reason for our money is to purchase goods 2. Money has not always been like today. 3. Coins are used because of the value they hold in themselves 4. The money in the USA is of value because the government says it holds value 5. Banks physically hold all of their deposits in a safe.

Chapter 14 – Section 1/2 ESSENTIAL INFORMATION The 3 functions / uses of money The 6 characteristics of money The Federal Reserve Bank and Money Supply Fractional Reserve Banking

Money and the 3 Functions Money – anything that serves as a medium of exchange, a unit of account, and a store of value Medium of exchange- anything that is used to determine value during the exchange of goods and services Unit of Account- a means for comparing the values of goods and services Store of Value- something that keeps its value if it is stored rather than spent

The 3 Types of Money Commodity money- objects that have value in and of themselves and that are also used as money Representative Money- objects that have value because the holder can exchange them for something of value Fiat Money- objects that have value because a government has decreed that they are an acceptable means to pay debts. CIRCLE THE TYPE THE USA HAS

Commodity Money Why is commodity money impractical for use in our modern society? Commodity money consists of objects that have value in and of themselves, like cattle, and that are also used as money Commodity money lacks several characteristics that make objects good to use as money, such as _____?

Representative Money Representative money makes use of objects that have value solely because the holder can exchange them for something else of value. Early Rep. $ took the form of PAPER RECEIPTS FOR GOLD AND SILVER People left their gold in goldsmith’s safes and would carry paper ownership receipts to show how much gold they owned. During the American Revolution, problems arose with “Continentals” because they were not backed by gold or silver and were therefore useless.

Fiat Money USA money today is fiat money, which has value because the government says it is acceptable. Citizens have confidence that the money will be accepted Because the Federal Reserve Bank controls the supply, it remains in limited supply, which enables it to keep its value.

6 Characteristics of Good Money Durable-withstands the elements Portable-can take it with us Divisible-can be divided into smaller units Limited Supply-helps to keep value Uniform-every quarter purchases something for 25 cents Acceptable-can use the money to buy goods/services at all locations

Durability and Portability Durability--Money must be able to withstand the physical wear and tear that comes with being used over and over again Portability—Money must be easily carried by people. Paper money and coins work because they are small and light…and cards

Divisibility and Uniformity Divisibility– money must be easily divided into smaller denominations Uniformity- people must be able to count and measure money accurately

Limited Supply and Accountability Limited Supply– to keep its value; therefore, the Federal Reserve regulates the amt. of money in circulation Acceptability– everyone in an economy must be able to use it everywhere

Currency The coins and paper bills people use as money are called currency In the past, people have used many things as currency including cattle, salt, precious stones, fur, and dried fish In today’s specialized economy, these things would not serve as good currency because they lack at least one of the 6 characteristics and the 3 functions.

Part 2 The Federal Reserve

The Gold Standard A monetary system in which paper money and coins had the value of certain amounts of gold – and the government kept gold to back up the paper money Is the USA on the gold standard?

Federal Reserve Bank (FED) In order for the fiat system to work, we need to control our ____________! This is the responsibility of the FED. This includes all of the different forms of money available in the economy

The FED HOW DOES THE FEDERAL RESERVE BANK MEASURE HOW MUCH MONEY IS IN THE ECONOMY? MONEY IS PUT INTO TWO CATEGORIES FOR MEASUREMENT

M1(supply) M2(supply) Immediately accessible Liquid All of M1 + Cash, coins, checking accounts, travelers checks All of M1 + Can be turned into cash but the process is slower Savings accounts, investments in stocks / retirement, equity in home

How can banks loan out more money than it physically holds? FRACTIONAL RESERVE BANKING Our system of banking where only a fraction of the deposits are kept in the bank. The rest is loaned out The FED controls the required % of deposits that banks must hold so the money supply can be controlled

COMPOUND INTEREST Interest paid on both the initial amount and the accumulated interest EX: $200 investment with 10% return = $20 in interest after 1 year Year 2 - $220 @10% = $22 in interest for a total of $242 after 2 years

RETURN TO YOUR T/F questions and TRY ANSWERING THEM AGAIN