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Chapter 10
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Chapter 10

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  1. Chapter 10 Money and Banking

  2. Money: its functions and properties • Objectives • 1. outline the functions that money performs and the characteristics that money possesses • 2. explain why the different types of money have value • 3. describe how the money supply in the United States is measured

  3. Functions of money • Money • Anything that people will accept as payment for goods and services • 3 important functions • 1. medium of exchange • 2. standard of value • 3. store of value

  4. Function 1: medium of exchange • Money serves as a medium of exchange • Money provides a flexible, precise, and convenient way to exchange goods and services • Barter • Exchanging goods and services for other goods and services

  5. Function 2: standard of value • Money also serves as a standard of value • Money provides both a way to express and measure the relative cost of goods and services and a way to compare the worth of different goods and services • Ex. a $20 t-shirt if worth two $10 phone cards, four $5 burritos, or twenty $1 bus rides

  6. Function 3: store of value • Money act as a store of value • Money holds its value over time • People do not need to spend all of their money at once or in one place • Issue: inflation • A sustained rise in the general level of prices

  7. Properties of Money • To perform the 3 functions of money, an item must possess certain physical and economic properties • Physical properties are the characteristics of the item itself • Economic properties are linked to the role that money plays in the market

  8. Property 1: physical • Durability • Ability to last through many transactions • Lack of durability not a good item to use as money • Portability • Needs to be small, light, and easy to carry • Paper bills preferred over cattle • Divisibility • Dollar can be divided in multiple combinations of pennies, nickels, dimes, or quarters • Divisibility flexible pricing • Uniformity • Uniform features and markings that make it recognizable • Consistent size, special symbols, and printing techniques • Distinctive markings harder to counterfeit

  9. Dollar bill analysis

  10. Types of money • Commodity money • Has intrinsic value based on the material from which it is made • Representative money • Backed by something tangible • Fiat money • Declared by the government and accepted by citizens to have worth

  11. Types 1: commodity of money • Commodity of Money • Something that has value for what it is • Items have value, aside from their value as money • Ex. gold, silver, precious stones, salt, olive oil valued for their scarcity and usefulness

  12. Type 2: Representative money • Representative money • Money that can be exchanged for something else of value • Middle Ages: Merchants began issuing receipts that promised to pay a certain amount of gold or silver • Not always safe to transport large sums of precious metals • Governments got involved by regulating how much metal was needed to be stored to back up paper money • Problems: • Representative money value fluctuates with supply and price of gold or silver • Inflation/deflation

  13. Type 3: Fiat Money • Fiat money • Only has value because the government has issued a fiat, or order, saying that this is the case • US dollar was linked to the value of gold until 1971 • $10 bill cannot be exchanged for gold; only for other combinations of US currency equal to that $10 • Fiat money (Coins) • Coins only contain a small amount of precious metals that is worth less than the face value of the coin • Fiat money has value because the government says it can be used as money and people accept that it will fulfill the function of money

  14. Money in the us • Currency • Paper money and coins • Demand deposits • Checking accounts • Near money • Savings accounts and time deposits that can be converted into cash relatively easily

  15. Money is the narrowest sense • Money is what can be immediately used for transactions (transactions money) • Demand deposits • Noninterest-bearing checking accounts that can be converted into currency simply by writing a check • Ex. traveler’s checks demand deposits

  16. Are savings accounts money • Near money (savings accounts) and other interest bearing accounts cannot be used directly to make transactions • Cannot necessarily buy goods with a savings account passbook as payment • But money can be transferred easily from a savings account to a checking account in order to be used to buy a good • Other examples of near money • Time deposits funds people place in a financial institution for a specific time in return for a higher interest rate • Certificates of Deposits (CDs) • Money markets • Restrict number of transactions • Require a minimum balance in account in order to receive a higher rate of interest