Chapter 10 Money and Banking

Money: its functions and properties Objectives 1. outline the functions that money performs and the characteristics that money possesses 2. explain why the different types of money have value 3. describe how the money supply in the United States is measured

Functions of money Money 3 important functions Anything that people will accept as payment for goods and services 3 important functions 1. medium of exchange 2. standard of value 3. store of value

Function 1: medium of exchange Money serves as a medium of exchange Money provides a flexible, precise, and convenient way to exchange goods and services Barter Exchanging goods and services for other goods and services

Function 2: standard of value Money also serves as a standard of value Money provides both a way to express and measure the relative cost of goods and services and a way to compare the worth of different goods and services Ex. a $20 t-shirt if worth two $10 phone cards, four $5 burritos, or twenty $1 bus rides

Function 3: store of value Money act as a store of value Money holds its value over time People do not need to spend all of their money at once or in one place Issue: inflation A sustained rise in the general level of prices

Properties of Money To perform the 3 functions of money, an item must possess certain physical and economic properties Physical properties are the characteristics of the item itself Economic properties are linked to the role that money plays in the market

Property 1: physical Durability Portability Divisibility Uniformity Ability to last through many transactions Lack of durability not a good item to use as money Portability Needs to be small, light, and easy to carry Paper bills preferred over cattle Divisibility Dollar can be divided in multiple combinations of pennies, nickels, dimes, or quarters Divisibility flexible pricing Uniformity Uniform features and markings that make it recognizable Consistent size, special symbols, and printing techniques Distinctive markings harder to counterfeit

Dollar bill analysis

Types of money Commodity money Representative money Fiat money Has intrinsic value based on the material from which it is made Representative money Backed by something tangible Fiat money Declared by the government and accepted by citizens to have worth

Types 1: commodity of money Something that has value for what it is Items have value, aside from their value as money Ex. gold, silver, precious stones, salt, olive oil valued for their scarcity and usefulness

Type 2: Representative money Money that can be exchanged for something else of value Middle Ages: Merchants began issuing receipts that promised to pay a certain amount of gold or silver Not always safe to transport large sums of precious metals Governments got involved by regulating how much metal was needed to be stored to back up paper money Problems: Representative money value fluctuates with supply and price of gold or silver Inflation/deflation

Type 3: Fiat Money Fiat money Only has value because the government has issued a fiat, or order, saying that this is the case US dollar was linked to the value of gold until 1971 $10 bill cannot be exchanged for gold; only for other combinations of US currency equal to that $10 Fiat money (Coins) Coins only contain a small amount of precious metals that is worth less than the face value of the coin Fiat money has value because the government says it can be used as money and people accept that it will fulfill the function of money

Money in the us Currency Demand deposits Near money Paper money and coins Demand deposits Checking accounts Near money Savings accounts and time deposits that can be converted into cash relatively easily

Money is the narrowest sense Money is what can be immediately used for transactions (transactions money) Demand deposits Noninterest-bearing checking accounts that can be converted into currency simply by writing a check Ex. traveler’s checks demand deposits

Are savings accounts money Near money (savings accounts) and other interest bearing accounts cannot be used directly to make transactions Cannot necessarily buy goods with a savings account passbook as payment But money can be transferred easily from a savings account to a checking account in order to be used to buy a good Other examples of near money Time deposits funds people place in a financial institution for a specific time in return for a higher interest rate Certificates of Deposits (CDs) Money markets Restrict number of transactions Require a minimum balance in account in order to receive a higher rate of interest