The Measurement and Time Value of Money Unit Four: The Measurement and Time Value of Money

Goals Describe the three purposes of money and list the six characteristics. Describe the three types of money and identify whether an account is counted as M1 and M2. Calculate the time value and the present value of an amount.

I. The Measurement of Money Medium of Exchange Used to determine value during trade Ex. Trading dollars for a slice of pizza Unit of Account Used to compare the value of different goods and services Ex. Worth of a soda is not the same as a TV Store of Value Keeps its value even if it is stored rather than used Ex. The dollar will still have some value next month or year Medium of exchange: avoid the complications of barter Unit of Account: compare prices; define debt obligations, determine taxes owed, and calculate the nation’s GDP; relative worth Store of Value: money is the most preferred store of value since it is the most liquid (spendable) of all assets

I. The Measurement of Money Durability Portability Divisibility Uniformity Acceptability Limited Supply Durability: must be an object that can hold up under use again and again Portability: must be an object that can be easily carried with us Divisibility: must be an object that can be broken into smaller units. Product have different values. Uniformity: must be an object that is uniform and is easily recognizable and will increase its acceptability Acceptability: must be an object that both producers and consumers are willing to use and accept Limited Supply: must be an object with a limited supply so that its value can be maintained

I. The Measurement of Money Commodity Money The object itself is useful beyond monetary value Representative Money Has value because it can be traded for something else of value Fiat Money Has value because the government has said it can be used to pay debt Commodity Money: the economy in America was horrible before the revolutionary war; hardly anyone had money from England, so they would trade goods to get the things they needed that they didn’t have the money for; tobacco was popular as a commodity money; cow, wheat, sugar, gold Representative Money: but it took a while for tobacco to grow, so people would writ IOUs until the money grew; but people would continue trading the IOUs as money with others after they received one; often times the tobacco was never picked up and the IOU ended up becoming a form of representative money for something that no longer existed; IOUs, bonds, silver certificates; bonds will get you fiat money; silver certificates can get you commodity money Fiat Money: US Dollars; our currency has value because we accept it as payment; there is no gold in a vault anymore; we got rid of that in the early 70’s from Nixon; printed at the federal reserve; it monitors the supply to prevent inflation

I. The Measurement of Money *Narrowest definition of money *Paper currency, coins, checkable deposits M2 *Broader definition of money Near monies + M1 *Near Monies includes and small timed deposits The fed measures the money supply by breaking it down into categories, then monitoring each category; the categories are based on how “liquid” or spendable the money is M1: can be used at anytime; all of these forms of money could be used at the cash register; checkable deposits or all deposits in commercial banks and “thrift” or savings institutions on which checks of any size can drawn; coins and paper money are debts of the government; checkable deposits are debts of commercial banks and savings institutions; coins and paper are token money that only have intrinsic value; prevent people from melting down coins and using them as a commodity; called the Federal Reserve Note; Paper 50%; coins 3%; checkable deposits are a large portion of M1 48%; commercial banks, savings and loans associations and credit unions M2: savings accounts, small time deposits (become available after maturity; institution pays higher interest rate than on a savings account), money market mutual funds (depositors invest money in a mutual fund company; the company invests money in things like CDs; the company offers interest on the CDs) Near money means that it can not be used directly in trade but can quickly be converted to M1, which can M3: includes large time deposits (100,000 or more); can be liquidated at any time at a risk of loss; businesses use them as a way of savings; Includes M1 and M2 as well; draw circles on the board;

II. The Time Value of Money Time Value Equation of Multiple Years: Amount received in one year from lending $X = $X * (1 + r)^n Present Value: $X N: Number of Years

II. The Time Value of Money Present Value Formula: $X = Current Cost and Benefits + (Future Cost and Benefits ) / (1 + r) Net Present Value: the present value of current and future benefits minus the present value of current and future costs.