1. 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

2. 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

3. 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)

4. 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)

5. 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)

6. 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

7. 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