Unit 4: Money, Banking, Monetary Policy

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Unit 4: Warm Ups #46

Why Money? #47

Money and Banking System

What do the following words have in common?– Cheese– Dead Presidents– Dough– FEDS– Bones– Benjamins

Money and Banking

Go to Dillards and buy a winter coat—Try to pay with a live chicken?

How about: 12 oranges, a Walrus tusk, a coffee mug and a picture of your cousin?

Then, you try to pay with a picture of an 18th century politician printed on green paper. What’s the difference????

Functions of Money

Money—Anything that people commonly accept in exchange for goods and services.

3 Functions of Money:– A medium of exchange– A standard of value– A store of value

Functions of Money

Medium of Exchange—is any item that sellers accept as payment for goods and services.– Buyers know that sellers will accept money in

payment for goods and services.– Restaurant workers are not paid in barbeque

sauce. $$$$– Teachers not paid in pencils. $$$$

Functions of Money

Standard of Value—Money provides people with a way to measure the relative value of goods and services.– What is a TV worth? Bicycle? DVD player?– Helps consumers to compare prices– Helps clarify opportunity costs– Helps to compare businesses performance:

• Profit of 300,000 bags of rice• Profit of 500,000 hamburgers• Profit of $100,000

Functions of Money

Store of Value—2 things must be met – Money must be nonperishable– Money must keep its value over time

• If both conditions are met, people can accumulate their wealth for later use.

Characteristics of Money

5 Major Characteristics of Money– Durability– Portability– Divisibility– Stability– Acceptability

5 Characteristics of Money

Durability—the ability to be used over and over again.– Eggs? Gold/Silver? U.S. Dollars?

Portability—the ability to be carried from one place to another.

– Small, lightweight

5 Characteristics of Money

Divisibility—the ability for money to be divided into smaller units.– Exact price comparisons can be made

Stability of Value—Must be stable in order to encourage saving.

Acceptability—People are willing to accept money in exchange for their goods/services.

Sources of Money’s Value

Commodity Money—An item that has value of its own as a commodity and that can be used also as money. – Diamonds, gold, silver, even salt!

Representative Money—Has value because it can be exchanged for something else of value.It has no intrinsic value. Bills that could be redeemed for gold/silver/ (Specie)

Sources of Money’s Value

Fiat Money—Coin, paper money have been decreed to have value by the government.– The value ultimately stems from

the citizens faith in the U.S. gov’t.• Currency—Coins, paper bills,

• used for trading.

Money Supply 14.2

M1—Is all the currency in circulation, value of all travelers checks, all checking account deposits, in banks.

M2—In addition to M1, M2 includes money market accounts, mutual fund shares, CD’s, plus all money in savings accounts.

M3 and L—Includes M2 plus all CD’s over $100,000. Also includes, savings bonds.

Drive Through Fun!

Go to a drive throughAsk the cashier the

following question:– Will you accept a federal

reserve note in payment for the food?

If they say no, then explain that federal reserve notes are money

Forms of Money

Coins and Paper Money—– Coins minted by the U.S. Mint– Bills printed by the Bureau of EngravingDemand Deposits—Also known as checking

accounts. Near Money—Assets such as savings accounts,

and time deposits. Near money because they cannot be

immediately used to buy goods or pay debts.

What is it? Money, Near Money?

Coins Interesting Facts

Pennies:– Content: 90% Zinc; 10% Copper– Melted down: Penny worth @ 3 cents

Nickels:– Content 70% Copper; 30% Zinc– Melted down: Nickel worth @ 8 cents

Penalty for melting:– 10 years in prison and big fine– Cannot ship out of country > $100 in pennies/nickels

The Six Characteristics of Money

Durability Objects used as money must

withstand physical wear and tear.

Portability People need to be able to

take money with them as they go about their business.

Divisibility To be useful, money must be

easily divided into smaller denominations, or units of value.

Uniformity Any two units of money must

be uniform, that is, the same, in terms of what they will buy.

Limited Supply Money must be available

only in limited quantities.Acceptability Everyone must be able to

exchange the money for goods and services.