Money and Banking Chapter 10 THREE USES OF

Money and Banking Chapter 10

THREE USES OF MONEY Medium of Exchange HOW IT FUNCTIONS BENEFITS Determines value Sell one good and during then purchase exchange of another rather goods and than trying to services trade for what you want

THREE USES OF MONEY Medium of Exchange Unit of Account HOW IT FUNCTIONS BENEFITS Determines value Sell one good and during then purchase exchange of another rather goods and than trying to services trade for what you want Compares value You can of goods and determine services whether a price is a good deal based on similar goods

THREE USES OF MONEY HOW IT FUNCTIONS BENEFITS Medium of Exchange Determines value during the exchange of goods and services Sell one good and then purchase another rather than trying to trade for what you want Unit of Account Compares value of You can determine goods and services whether a price is a good deal based on similar goods Store of Value Keeps value if stored and not used Money does not have to be spent immediately

The 6 Characteristics of Money 1. Durability: must be able to be used over and over. 2. Portability: must be able to be easily carried around 3. Divisibility: must be able to divide into smaller denominations. 4. Uniformity: must be able to count and measure accurately 5. Limited Supply: must be able to control the amount available 6. Acceptability: people who accept it must be able to use it to get what they want or need

SOURCES OF MONEY’S VALUE SOURCES MEANING EXAMPLES Commodity Objects that have value in themselves and are used for money Wheat, sheep, etc. Representative Does not have value itself, but represents something that does Gold/silver certificate, gift card Fiat Has value because the U. S. currency government has declared it an acceptable means to pay debt

For nearly 200 years, the U. S. operated on the gold standard. The value of the dollar was tied directly to a certain amount of gold. Two Advantages of the Gold Standard § It set a definite value for the dollar so people could redeem the value of their paper money at any time. § The government could only issue currency if it had gold to back it up, preventing the government from printing too much.

The Federal Reserve System § Created in 1913 and reorganized the national banking system: § The Federal Reserve System is made up of 12 districts § Federal Reserve Board: appointed by the President and oversee all Federal Reserve Banks § Short-term loans: allow member banks to take out loans to meet short term demands § The Fed issues Federal Reserve Notes, the currency used in the U. S. ; allows the Federal Reserve to increase/decrease money supply according to needs. § Federal Deposit Insurance Corporation (FDIC): insures a customer’s deposits up to $250, 000 per insured bank.

Money Supply (all the money in circulation) M 2: cannot be M 1: easily turned into cash (“liquid”) directly used as cash (“near money”) § Cash § Checking accounts (Demand Deposits) § Traveler’s checks § Savings accounts § Money market funds § Mutual Funds

Functions of Financial Institutions 1. Storing Money § Checking Accounts § Demand deposits (money available “on demand”) 2. Saving Money § Savings Accounts § Money Market Accounts § Certificate of Deposit (CD) 3. Loans § College § Cars 4. Mortgages § Real Estate § Home Improvement 5. Credit Cards