CHAPTER 10.1 CHAPTER 10.1

MONEYThree uses of $

6 Characteristics of $Source of $’s value

MONEYThree uses of $

6 Characteristics of $Source of $’s value

Three uses of MoneyThree uses of Money

Money? Anything that serves as a medium of

exchange, a unit of account, and a store of value

1. Medium of exchange Determines the value during the

exchange of goods and services Bartering - direct exchange of one set

of goods/ services for another

Money? Anything that serves as a medium of

exchange, a unit of account, and a store of value

1. Medium of exchange Determines the value during the

exchange of goods and services Bartering - direct exchange of one set

of goods/ services for another

Still used today all over the world Becomes impractical as an economy

grows

Easier to use money than bartering No agreements necessary

Still used today all over the world Becomes impractical as an economy

grows

Easier to use money than bartering No agreements necessary

2. Unit of account A way to compare value of goods and

services

3. Store of value Keeps its value if it is stored rather

than used No expiration date *Inflation* - general increases in prices

2. Unit of account A way to compare value of goods and

services

3. Store of value Keeps its value if it is stored rather

than used No expiration date *Inflation* - general increases in prices

6 Characteristics of Money6 Characteristics of Money

Anything can be used as money Cattle, salt, gold, dried fish, furs,

porpoise teeth, tulip bulbs 1. Durability

Must withstand physical wear and tear

$1 lasts about a year in circulation Easily replaced

Anything can be used as money Cattle, salt, gold, dried fish, furs,

porpoise teeth, tulip bulbs 1. Durability

Must withstand physical wear and tear

$1 lasts about a year in circulation Easily replaced

2. Portability Must be able to conduct daily

business with it Easily transferred from one person to

another 3. Divisibility

Useful if it can be easily divided

2. Portability Must be able to conduct daily

business with it Easily transferred from one person to

another 3. Divisibility

Useful if it can be easily divided

4. Uniformity Must be able to count and measure

accurately

5. Limited supply Federal Reserve controls the supply

of money in circulation

4. Uniformity Must be able to count and measure

accurately

5. Limited supply Federal Reserve controls the supply

of money in circulation

6. Acceptability Must be able to use it anywhere Sudden loss of confidence will deflate

the value Euro = 1.37 USD

6. Acceptability Must be able to use it anywhere Sudden loss of confidence will deflate

the value Euro = 1.37 USD

Where does money get its value?

Where does money get its value?

3 types of money

1. Commodity Money• Objects that have value themselves

• Salt, Cattle, precious stones• Have a value other than money• Disadvantages?

3 types of money

1. Commodity Money• Objects that have value themselves

• Salt, Cattle, precious stones• Have a value other than money• Disadvantages?

2. Representative Money Holder can use it for something else

IOU Paper receipts for gold or silver Bills of credit

2. Representative Money Holder can use it for something else

IOU Paper receipts for gold or silver Bills of credit

3. Fiat Money Money that holds value because the

government says so Our money

Fed controls supply, govt says money has value so it is “legal tender”

3. Fiat Money Money that holds value because the

government says so Our money

Fed controls supply, govt says money has value so it is “legal tender”

10.2 10.2

Federal Deposit Insurance Corporation (FDIC) Govt agency that insures customer

deposits if a bank fails Covered up to $250,000 (2013)

Federal Deposit Insurance Corporation (FDIC) Govt agency that insures customer

deposits if a bank fails Covered up to $250,000 (2013)

10.3 Banking Today10.3 Banking Today

How is money supply measured

Services banks provide

Types of financial institutions

How is money supply measured

Services banks provide

Types of financial institutions

Money SupplyMoney Supply

All of the money available in the US economy M1 - Money immediately available

All assets that have liquidity Used as or directly converted to cash

All the money not in bank vaults Money in checking accounts

Demand deposits

Travelers checks

All of the money available in the US economy M1 - Money immediately available

All assets that have liquidity Used as or directly converted to cash

All the money not in bank vaults Money in checking accounts

Demand deposits

Travelers checks

M2 - all the money in M1 + additional assets Saving Accounts

Can’t be used as cash

Money Market Mutual Funds Money pooled together that is used to buy

short term securities

M2 - all the money in M1 + additional assets Saving Accounts

Can’t be used as cash

Money Market Mutual Funds Money pooled together that is used to buy

short term securities

BanksBanks

Services Banks offer 1. Storing money

Safe convenient place to keep money

Insured against robbery Federal Deposit Insurance Corporation

(FDIC) Covers accounts up to $250,000 (2013)

Services Banks offer 1. Storing money

Safe convenient place to keep money

Insured against robbery Federal Deposit Insurance Corporation

(FDIC) Covers accounts up to $250,000 (2013)

2. Saving Money Savings Accounts Checking Accounts

Most common Good for frequent withdrawals Small interest rates annually

2. Saving Money Savings Accounts Checking Accounts

Most common Good for frequent withdrawals Small interest rates annually

Money Market Account Allows a certain amount of checks written Interest can go up or down (Variable)

Certificates of Deposit (CD’s) Guaranteed amount of interest over a

specific time period Money cannot be used until time period

is over Penalties for removal

Money Market Account Allows a certain amount of checks written Interest can go up or down (Variable)

Certificates of Deposit (CD’s) Guaranteed amount of interest over a

specific time period Money cannot be used until time period

is over Penalties for removal

3. Loans Fractional reserve banking

Banking system that keeps only a fraction of funds on hand, lends out the rest

More it lends out, more money they make Business, car, home improvement,

college, personal Default

3. Loans Fractional reserve banking

Banking system that keeps only a fraction of funds on hand, lends out the rest

More it lends out, more money they make Business, car, home improvement,

college, personal Default

4. Mortgages - Used specifically for real estate 15, 20, 25 years or longer

Credit check, Can determine your rate and length

4. Mortgages - Used specifically for real estate 15, 20, 25 years or longer

Credit check, Can determine your rate and length

5. Credit Cards Issued by banks to individuals with

promise to pay back with interest Better credit will increase your

spending limit

5. Credit Cards Issued by banks to individuals with

promise to pay back with interest Better credit will increase your

spending limit

Interest - price paid for borrowed money Principal - amount borrowed

Two Types Simple interest- paid only on

principal $100 + 5% = $105

Compound interest - pays on both principal and interest accumulated

Interest - price paid for borrowed money Principal - amount borrowed

Two Types Simple interest- paid only on

principal $100 + 5% = $105

Compound interest - pays on both principal and interest accumulated

Types of Financial Institutions

Types of Financial Institutions

1. Commercial Banks Usually work with businesses Checking Accounts Accept deposits Some are regulated by States 1/3 are national banks part of the Fed

Res Play the biggest roles in our economy

1. Commercial Banks Usually work with businesses Checking Accounts Accept deposits Some are regulated by States 1/3 are national banks part of the Fed

Res Play the biggest roles in our economy

2. Savings and Loans (S&L’s) Originally established aid in home

building Save money in an account until you

have enough to buy a home Now offer many of the same functions

as other banks

2. Savings and Loans (S&L’s) Originally established aid in home

building Save money in an account until you

have enough to buy a home Now offer many of the same functions

as other banks

3. Savings Banks Started for people who made smaller

deposits than big companies Owned by those who deposited money

Shared the profits Turned to selling stocks Started the first checking accounts that

paid interest Negotiable Order of Withdrawal (NOW)

3. Savings Banks Started for people who made smaller

deposits than big companies Owned by those who deposited money

Shared the profits Turned to selling stocks Started the first checking accounts that

paid interest Negotiable Order of Withdrawal (NOW)

4. Credit Unions Cooperative lending institutions Particular groups Fairly small Specialize in types of loans

Better rates for members

4. Credit Unions Cooperative lending institutions Particular groups Fairly small Specialize in types of loans

Better rates for members

5. Finance Companies Make installment loans

Spread costs over a number of months Usually higher interest rates vs banks

5. Finance Companies Make installment loans

Spread costs over a number of months Usually higher interest rates vs banks

Electronic BankingElectronic Banking

Changed the way paper money is used ATMs

Deposit $ Withdrawal Balance info

Debit Cards Home Banking Automatic Clearing House Stored Value Cards (Smart Cards)

Changed the way paper money is used ATMs

Deposit $ Withdrawal Balance info

Debit Cards Home Banking Automatic Clearing House Stored Value Cards (Smart Cards)