Money Mr. Cady

Key Concepts Savings=Investment The most important types of financial intermediaries are mutual funds, pension funds, life insurance companies, and banks. Commodity money, fiat money. Money has three main functions: a medium of exchange, a standard of value (or unit of account) and a store of value. The characteristics of money include portability, uniformity, acceptability, durability, divisibility and stability in value. There are three definitions of money including M1, M2, and M3 with M1 being the most liquid money.

Savings=Investment According to the savings–investment spending identity, savings and investment spending are always equal for the economy as a whole. Proof: Total Income = Total Spending Total Income = Consumption + Savings Total Spending = Consumption + Investment Consumption + Savings = Consumption + Investment

Financial Intermediaries A mutual fund is a financial intermediary that creates a stock portfolio by buying and holding shares in companies and then selling shares of the stock portfolio to individual investors. Pension funds are nonprofit institutions that collect the savings of their members and invest those funds in a wide variety of assets, providing their members with income when they retire.

Financial Intermediaries Life insurance companies guarantee a payment to the policyholder’s beneficiaries (typically, the family) when the policyholder dies.

Money Commodity Money - Something that performs the function of money and has alternative uses. The Barter System used commodities in exchange for goods and services. Examples: Gold, silver, cigarettes, etc. Fiat Money - Something that serves as money but has no other important uses. Fiat money derives its value from its official status. Examples: Paper Money, Coins

Functions of Money 1. A Medium of Exchange 2. A Unit of Account Money can easily be used to buy goods and services with no complications of the barter system. 2. A Unit of Account Money measures the value of all goods and services. Money acts as a measurement of value. 1 goat = $50 = 5 chickens OR 1 chicken = $10 3. A Store of Value Money allows you to store purchasing power for the future. Money doesn’t die or spoil.

Types of Money Liquidity- ease with which an asset can be accessed and converted into cash (liquidized) M1 (High Liquidity) - Cash, Traveler’s Checks and Checkable Deposits. In general, this is known as the MONEY SUPPLY M2 (Medium Liquidity) - M1 plus other “near money” such as savings accounts (CD’s) and mutual funds M3 (Low Liquidity) – No longer used