Unit 4 - Money

Money- is any asset that can be easily used to purchase goods and services.

Uses of Money:
 As a medium of exchange

- Used to determine value

- You need something to compare cost to

- When you hide money (shoe box, under mattress)

- In a bank it earns interest, at home its the same value

 

Types of Money

Commodity Money - value within its self (Salt, olive oil, gold)

Representative Money- represents something of value
-IOU - pay back worthless paper

 

Fiat Money

- Money because government says so (Paper currency, coins)

 

*Currency is not the same as money

All money is not currency

6 Characteristics of Money

1. Durability (last long)
2. Portability ( take it everywhere)
3. Divisibility (Broken down) ex(1 dollar is 10 dimes)
4. Uniformity (looks the same, updates)
5. Limited supply
6. Acceptability 

Money Supply

- All the available money in the economy 

M1 money- Consists of LIQUID ASSETS

-Easily can convert to cash
-Currency (paper)

-Coin

-Check-able deposits  (checks)

-Travelers Checks

M2 money- Consists of M1 Money + Savings Accounts + money market accounts.

 

3 Purposes for financial Institutions

1. Store Money
2. Save Money
3. Loan Money- Credit card/Mortgage 

4 Ways to Save Money

1. Savings Account
2. Checking Account
3. Money Market Account
4. CD certificate of Deposit

3+4 Higher interest rate. 

Loans
Banks operate on fractional reserve bank system

Interest Rate
Principal- amount of money borrowed
Interest- price paid for the use of borrowed money
- simple interest- paid on the principal
- compound interest- paid on the principal + the accumulated Interest

Types of financial Institutions

1. Commercial banks
2. loans and saving institutions
3. mutual savings banks
4. credit unions
5. financial companies