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Chapter 10
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Use of money is a social custom Its role is to facilitate exchange Money itself is any asset accepted as payment for goods or services Without money we would barter like traditional societies Although barter works it can be complex and inefficient
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1. Medium of Exchange: commonly accepted payment 2. Unit of Account: standardized and easily measured 3. Store of Value: holds purchasing power over time
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Durable—lasts for an extended period Portable—easy to carry & exchange Divisible—easily broken into measurable units Uniform—similar in appearance and has a standard value Scarce—Not overly printed or in too great abundance Accepted—Society is certain that it has value
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Fiat—has value because the government says so “legal tender” Representative— stands in for money IOU, silver certificate Commodity—has other uses besides acting as money Tobacco, water
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Money supply all the money available in the economy This includes money in and out of banks Liquidity refers to how easily an asset can be turned into cash Federal Reserve tracks the amount of money “in circulation” or in the economy http://www.youtube.com/watch?v=S-bJYM_7MLw
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The Financial System—various markets, players and institutions that coordinate the channeling of funds between borrowers and savers Borrowers—demand money from the system with the knowledge that they will have to pay it back with interest Savers—supply money to the system with the expectation that it will be paid back to them with interest
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Financial Markets places where savers can lend their money to borrowers Stock Market—firms sell a portion of their profits (stock) which can be resold Bond Market—firms issue bonds (IOUs) which can be resold Any stake in an asset traded on a financial market is called a security
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Investment Banks—raise money for companies (perhaps even nations) and manage wealth of private investors (merchant bank) JPMorgan, Goldman Sachs Credit Unions—cooperative lending for specific groups Marshland, Teachers Commercial Banks—offer a wide range of lending services to the public (retail bank) Bank of America, United Community
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Banks serve several purposes: 1. Store Money—safe and insured 2. Vehicle for Saving— variety of accounts available 3. Loans—renting money at a cost 4. Credit—form of deferred payment Principle is amount owed Interest is cost of renting the principle https://www.youtube.com/watch?v=RH_bNdlOoiA
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FDIC preserves and promotes public confidence in the U.S. financial system by insuring depositors identifying, monitoring and addressing risks to the deposit insurance funds limiting the effect on the economy and the financial system when a bank or thrift institution fails
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