Chapter 10 Money and Banking

Section 1: Money Objective: Describe the three uses of money. List the 6 characteristics of money. Analyze the sources of money’s value.

Money - Anything that serves as a medium of exchange, a unit of account, and a store of value

The 3 Uses of Money 1. Medium of Exchange - used to determine value during an exchange - people would have to barter - hard to do in a specialized society

Why is bartering hard to do in the US today?

EX: Suppose you wanted to trade your portable DVD player for a brand new bike. You would probably would have a great deal of trouble making the exchange. First, you would need to find a person who wanted to both sell the model of bike that you wanted and buy your particular DVD player. Second, this person would need to agree that your DVD player is worth the same as his or her bike.

2. Money as a Unit of Account - means for comparing the value of goods and services

EX: Suppose you see a jacket on sale for $30. You know this is a good price b/c you have checked the price of the same or similar jackets in other stores. You can compare the cost of the jacket in this store with the cost in other stores b/c the price is expressed in the same way in every store in the US -- dollars and cents.

3. Money as a Store of Value - something that keeps its value if it is stored rather than spent

EX: When you sell your DVD player to purchase a mountain bike, you may not find the bike you want right away. In the meantime, you can keep the money in your wallet or bank. The money will still be valuable and will be recognized as a medium of exchange weeks or months from now.

One exception… - rapid period of inflation - EX: the US experienced a 10% inflation. If you sold your DVD player at the beginning of the year for $100, the money you received would would have 10% less value, or buying power, at the end of the year. Inflation would have caused the price of the mountain bike to increase by 10% during the year, to $110.

The 6 Characteristics of Money 1. Durability 2. Portability 3. Divisibility 4. Uniformity 5. Limited Supply 6. Acceptability

Assignment Groups of 2 et or 3 - create a web, poster, chart etc. - list the 6 characteristics of money - define - example - present

Sources of Money’s Value Think about the bills and coins in your pocket. They are durable and portable. They are also easily divisible, uniform, in limited supply, and accepted throughout the country. As convenient and practical as they may be, however, bills and coins have very little value in and of themselves. What, then, makes money valuable?

Commodity Money - objects that have value and are also used as money EX:

Representative Money - objects that have value b/c the holder can exchange them for something else of value - EX: - Specie - coins made of gold or silver

Fiat Money - objects that have value b/c a govt. says it has value - EX:

Section 2: The History of American Banking Objectives: - Describe the shifts between centralized and decentralized banking before the Civil War. - Explain how government reforms stabilized the banking system in the 1800s. - Describe developments in banking in the early 1900s. - Explain the causes of 2 recent banking crises.

Before the Civil War 2 Views of Banking: Hamilton v. Jefferson - Federalists v. Antifederalists strong, central govt. power in the hands of states national bank fears wealthy would gain control national currency states establish banks monitor banks states monitor banks

Assignment You will be given a portion of history. You need to determine the key points of your era and report back to the class. Include the following: - major events w/ BRIEF description - terms with definitions

Before the Civil War

The 1800s

The 1900s

Crises in Banking

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Section 3: Banking Today Objectives: - Explain how the money supply in the US is measured. - Describe the functions of financial institutions. - Identify different types of financial institutions. - Describe the changes brought about by electronic banking.

Measuring the Money Supply Money Supply - amount of money available in the US economy

Measuring the Money Supply M1 - money people can access quickly and easily - liquidity: directly converted to cash - demand deposits: money in checking accounts - traveler’s checks

M2 - assets (near money) - can be converted to cash - savings accounts - money market mutual funds → a fund that pools money from small savers to purchase short-term govt. and corporate securities

What do banks offer?

Functions of Financial Institutions Storing Money Saving Money - savings accounts - CDs - checking accounts

Functions of Banks Loans - fractional reserve banking - defaults - failing to pay back a loan Mortgages - loans used to buy real estate - 10, 15, 20, or 30 year loans

Functions of Banks Credit Cards Simple and Compound Interest - interest: price paid for the money borrowed - principle: the amount borrowed

How do banks make a profit?

Types of Financial Institutions Commercial Banks Savings & Loans Associations Savings Banks - Negotiable Order of Withdrawal (NOW) → interest bearing checking accounts Credit Unions - member specific

Types of Financial Institutions Finance Companies

Electronic Banking ATMS Debit Cards - card used to withdraw $ from an account - subtracts the amount from your checking Home Banking - check balance - transfer money

Electronic Banking Automated Clearing Houses - pay bills without writing checks (online) - automatically paid to creditor (person to whom the money is owed) Store Value Cards

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