Money Objectives Describe the three uses for money Explain the six characteristics of Money Understand the sources of Money’s value Explain how the money supply in the United States is measures Explain the functions of financial Institutions Understand Simple interest vs Compound

Three Uses Money – is anything that serves as a medium of exchange, a unit of account, and a stored value 1. A medium of Exchange – is anything that is used to determine value during the exchange of goods and services - without money people Barter (direct exchange of good for a good) - money makes exchanges much easier 2. A Unit of Account – a means for comparing the values of goods and services - example – you know something is a good price when you have checked the price of the same good in another store 3. Store of Value – money keeps its value if you hold on to it – or store it - except when there is rapid inflation

6 Characteristics of Money Currency – coins and paper bills as money Durability – If it wears out or easily destroyed it cannot be trusted as a store of value Portability – Needs to be easily carried and transferred from person to person Divisibility – Must be easily divided into smaller units – (16th and 17th cent. People used pieces of a coin to pay exact amounts) Uniformity – Any two units of money must be uniform – Can’t have a gold quarter and silver one Limited supply – if money was unlimited it would have no value – (Federal Reserve controls circulation) Acceptability – everyone must be able to exchange objects that serve as money in exchange for goods and services – (Russian Rubles)

Sources of Money’s Value Commodity Money – objects that have value in themselves and that are also used as money – example diamonds – not a good source of money Representative Money – makes use of objects that have value because the can exchange them for something else of value – ex Gold for Paper receipts Fiat Money – money that has value because the government has ordered that it is an acceptable means to pay debts – (money supply essential)

Measuring the Money Supply Money Supply – all the money available in U.S. economy; travelers checks, currency, checking account deposits - to keep track economists separate M1 and M2 M1 accessible money that have liquidity (used direct or easily converted to cash) - 48% currency outside of bank vaults - Demand Deposits or checking accounts - small portion travelers checks M2 is all assets in M1 and others called near money – can’t be used as cash directly but fairly easy – (savings account)

Functions of Financial Institutions Banks store money (insured in vaults) Saving Money (CD’s, Savings, Checking) Loans – lend money to profit off interest - Fractional reserve banking – a bank that keeps a little money on hand and lends the rest - If borrowers don’t pay back they default Mortgages- loan to buy real estate – usually 15,20, 30 years Credit Cards – a card able to buy goods based on promise to pay bank back

Simple and Compound Interest Interest – is the price paid for the use of borrowed money The amount borrowed is called the principal Simple interest is interest paid on principal 100$ at 20$ simple interest = 120$ (month) Compound Interest is interest paid on principal and interest - 100$ at 20% = 120$, next month 120$ at 20%=144$, 144$ at 20%=168$ Interest and fees is how banks profit