Money Money has three functions Medium of Exchange

Money

Money has three functions Medium of Exchange Unit of Account Store of Value

Money as a Medium of Exchange Anything used to determine value during the exchange of goods/services Without money people use barter, or the direct exchange of one good or service for another Can you think of an example of how a barter system could get difficult?

Money as a Unit of Account Money provides a means to compare the value of goods and services Can you think of any “caps” you put on certain products My example: I will never pay more than $5 for a DVD.

Money as a Store of Value Money keeps its value if you decide to hold on to itstore it- or save it Sometimes an economy experiences rapid inflation: general increase in prices Example 20% inflation in one year A thousand dollar computer would cost you $1200 in the upcoming year

Key Terms 8/9 Due tomorrow Quiz on Key terms 8/9 tomorrow Money Practice HW Due tomorrow Review Packet Due Monday: Counts as a grade.

Six characteristics of money Durability Portability Divisibility Uniformity Limited supply Acceptability

Durability Money must withstand the physical wear and tear that comes with being used over and over again

Portability People need to be able to take money with them Money must be easily transferable from one person to another Can you think of anything that has made this even easier in recent years?

Divisibility Money must be easily divided into smaller denominations, or units of value For fun some time go to Mc. Donalds order something off the dollar menu It will come to 1. 08 Hand the cashier 20. 25 watch the mayhem ensue

Divisibility Livestock as currency Come on Man

Uniformity Any two units of money must be the same in terms of what they will buy People must be able to count and measure money accurately What is a possible problem with fish?

Limited Supply The Federal Reserve System controls the supply of money in circulation They are able to keep the right amount of money available What would happen if the federal reserve prints too much money for circulation?

Acceptability Everyone in the economy must agree on the currency and be able to exchange the objects that serve as money for goods and services Can you think of some forms of payment that are accepted some places, but not others?

Which of the following would be the best currency based on the characteristics. ? Hershey Kisses Phone Books Playing Cards Coat Hangers Diamonds

Sources of Money’s Value Commodity Money Representative Money Fiat Money

Commodity Money An object that has value in and of itself Salt, Cattle, Stones, Gold Which Characteristics of Money does Commodity Money lack?

Representative Money Uses objects that have value because the holder can exchange them for other things of value Example Paper receipts for gold or silver instead of carrying around the gold and silver

So Our money is backed by gold and silver right?

Fiat Money is valuable because the government says it is Fiat = an order or decree

The Federal Reserve Control the Money Supply Through Monetary Policy Act as the Central Bank of the United States Provide financial services Supervise Banks Regulate banks and rate banks

Liquidity The degree of ease with which an asset can be converted into money without significant loss of value

M 1 Money Currency, travelers checks, demand deposits, other checkable deposits Accounts where you can demand my money at any time Most liquid

M 2 Money Is M 1 Money plus savings accounts, small time deposit [(Cd’s) short for certificate of deposit] and individual money market mutual fund balances A CD is a great fit if you don't need immediate access to your funds and want a predictable rate of return.

L Money contains all of M 3 plus commercial paper, savings bonds, and government securities with maturities of 18 months or less L-Long term securities Least liquid

Durability Acceptability Uniformity Limited Supply Divisibility Portability

Fiat Representative Commodity