Chapter 10 : Lesson 1 The Evolution, Functions, and Characteristics of Money

Essential Question: Why did money replace the barter system?

Before money we had Barter Barter: is a voluntary exchange of items which are not alike or set in value Barter is alive and well, but has drawbacks

Different types of Barter Items

Drawbacks of Barter Uncertain connection of producers & consumers Uncertain valuation of barter goods Indivisibility of some barter goods Storage of excess

Commodity Money: money that had an alternative use as an economic good: Example: gunpowder, flour, corn, musket ball, Gold, and silver

Fiat Money: money by the government decree; has no alternative value or use as a commodity

Specie: money in the form of gold or silver coins

Monetary Unit: Standard unit of currency in a country’s money supply; American dollar, British pound, ect..

Four Characteristics of Money

1. Portable Light and Flexible Metals, Cotton, Plastic Yap Islander Coins

Giant stone disks were used as money on the Yap Islands Giant stone disks were used as money on the Yap Islands. Some disks were 12ft wide. 14

2. Durable Average life of a $1 bill 18 months Average life of a $1 coin 13 years! Made of metals, cotton, plastic,

3. Divisible Available in various denominations Mexico= Pesos & Centavos Russia= Rubles & Kopeks UK= Pounds & Pence India= Rupees & Paistres China= Yuan & Jiao

4. Limited Supply Small supply= High Value Old bills shredded Counterfeits increase Q Supply http://www.newmoney.gov/newmoney/flash/interactive100/index.html

Three Functions of Money Money Does… Medium of exchange I trade 1 hour labor for $31.25/hr + benefits Measure of Value I check prices at several stores Store of Value I have $2000 in my savings

M1-M3 So where is the most money in the banking system? M1 Cash and Cash instruments M2 Small Value, Short Time Deposits M3 Large Value, Longer Time Deposits (best rates of interest

3 Types of Money Liquidity- ease with which an asset can be accessed and converted into cash (liquidized) M1 (High Liquidity) - Coins, Currency, and Checkable deposits (personal and corporate checking accounts). In general, this is the MONEY SUPPLY M2 (Medium Liquidity) - M1 plus savings deposits (money market accounts), time deposits (CDs = certificates of deposit), and Mutual Funds below $100K. M3 (Low Liquidity) - M2 plus time deposits above $100K.

Review Question: Chapter 10 : Lesson 1 Read pages 276-281 and answer Review Questions on page 281. Hand in Google Class Room.