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is anything that people will accept as payment for goods and services

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money

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No matter what people choose to use as money it must perform 3 things: 1. Medium of exchange 2. Standard of value 3. Store of value

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3 functions of money

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or the means through which goods and services can be exchanged

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Medium of exchange

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exchanging goods and services for other goods and services

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barter

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the yardstick of economic worth in the exchange process

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Standard of value

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that is, something that holds its value over time.

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store of value

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the ___ of money are the characteristics of the item itself. These include: Durability, Portability, Divisibility, and Uniformity

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Physical properties

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the __ properties of money are linked to the role that money plays in the market. This includes: Stability of value, scarcity money, and acceptability

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Economic properties

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money must be sturdy enough to last throughout many transactions. Something that falls apart when several people handle it or that spoils easily would not be a good item to use as money.

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Durability

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money needs to be small, light, and easy to carry. This makes it easy to see why paper bills are better than cattle as money.

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Portability

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Money should also be able to be broken up so change can be made. Divisibility also allows flexible pricing.

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Divisibility

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money must have features and markings that make it recognizable. Coins used as money look different then metal disks. Paper money has special symbols and printing techniques. Distinctive markings also make it more difficult to counterfeit.

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Uniformity

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money's purchasing power should be stable. The amount of goods and services that you can buy should not change quickly. Rapid changes would mean money would not successfully store value.

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Stability of value

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money must be scarce to have any value. when the supply of a product outstrips demand, there is a surplus and prices for that product fall. When the supply of money is greater than the demand, money looses value (or purchasing power)

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Scarcity of money

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People who use the money must agree that it is acceptable. It must be a valid medium of exchange. They will accept money in payment for goods and services because others will also accept it as payment.

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Acceptability

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derives its value from the type of material from which it is composed. This money has value for what it is, these items have value in and of themselves, apart from their value as money. EX. gold, silver, precious stones, salt, olive oil, and rice.

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Commodity money

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This is paper money backed by something tangible - such as silver or gold - that gives it value. This money can be exchanged for something else of value

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Representative money

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has no tangible backing, but it is declared by the government that issues it, and accepted by citizens who use it to have worth. This money only has value because the government issues an order saying so.

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Fiat money

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this is paper money and coins

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currency

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because funds in checking accounts can be converted into currency "on demand"

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demand deposits

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funds can be converted into money on demand

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checking accounts

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it includes savings accounts and other similar time deposits that cannot be used as a medium of exchange but can be converted into cash relatively easily. These are monetary instruments that are almost but not exactly money. Money can be immediately used for transactions. this is most of the money people spend

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near money

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are funds that people place in a financial institution for a specific period of time in return for a higher interest rate.

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time deposits

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included in the M1, these are the narrowest measure of money supply, this means they are or can easily become currency. this includes, currency + demand deposits (checking accounts)

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liquid assests

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this division of money includes M1 and various types of near money this includes savings accounts, other small denomination time deposits (CDs), and money market mutual funds (invested in stocks)

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M2

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MV = PQ

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quantity theory of money

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this stands for money in the quantity theory of money equation. How much money is there

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M

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this stands for velocity in the quantity theory of money equation. How many times it is spent, how fast it is moving through the economy. this is the hardest part of this equation to find.

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V

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this stands for Price in the quantity theory of money equation. how much money are the goods.

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P

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this stands for quantity of goods in the quantity theory of money equation. how many goods are there out there?

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Q

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this program in the government controls the amount of money in circulation. They try to make it easier to borrow and lend money.

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the federal reserve

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banks chartered or licensed by state governments - were established to help the US.

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State banks

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he proposed chartering a privately owned national bank to put the government on a sound financial footing

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Alexander Hamilton

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a currency accepted by everyone in a nation. In the US. this currency was back by gold and silver.

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National currency

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this charter had greater financial resources than the first bank and succeeded in making the money supply more stable.

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new bank second charter

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these laws were passed by each state, they allowed individuals or groups that met its requirements to open banks. They had their own currency called bank notes.

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Free banking laws

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The government did not like bank notes so they issued a new currency backed by government bonds, they were printed with green ink.

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Greenbacks

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banks chartered by the national government

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National banks

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a system in which the basic monetary unit - for example , one dollar - is equal to a set amount of gold.

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gold standard

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passed by congress in 1913 this act established the federal reserve system - a true central bank. Consisting of 12 regional banks with a central decision making board.

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Federal Reserve Act

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in 1929 many banks failed due to bank runs because many consumers panicked and withdrew all their money.

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the Great depression

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this act from FDR instituted reforms such as regulating interest rates that banks could pay and prohibiting banks from selling stocks.

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Banking Act of 1933

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also known as The Federal Deposit Insurance Corporation, this service provided federal insurance so that if a bank failed, people would no longer lose their money.

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FDIC

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is used to refer to almost any kind of financial institution that takes in deposits and makes loans, helping individuals, businesses, and governments to manage their money. In the end the goal of the bank is to earn a profit.

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bank

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there are 3 types: 1. Commercial banks 2. Savings and loans 3. Credit Unions

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3 types of banks

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these are the oldest form of banking and are the financial institutions most commonly through of as banks. They provide loans and businesses, checking and savings accounts, investment assistance, and credit cards.

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privately owned commercial banks

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created by individual states to take savings deposits and provide home mortgage loans. They usually don't loan to businesses but they do lend to individuals and families for homes and cars.

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Savings and loans

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also known as the federal savings and loan insurance corporation of 1934.

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FSLIC

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they are cooperative savings and lending institutions. they offer savings and checking accounts. most specialize in mortgages and auto loans. they offer more services for their members THEY ARE NON-PROFIT. they have a membership requirement

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Credit unions

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also known as the national credit union association, this is where most credit unions have deposit insurance, they guarantee credit loans.

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NCUA

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Customers can: store money earn money borrow money

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banks do three things

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banks began as safe places to store money and other valuables. customer's bank accounts are also insured in case the bank fails banks are also a safe place to store important papers and valuables

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Customers can store money

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when customers deposit their money in bank accounts, they can earn money on their deposits. Savings accounts and some checking accounts pay some level on interest.

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customers can earn money

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banks give out different approved loans for different circumstances. Credit card purchases are loans too. Mortgages and loans.

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customers can borrow money

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the loan stays the same for 30 years it does not change in value.

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fixed loans

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these loans fluctuate depending on the interest of the year - so many people choose adjustable because they usually end up paying less for their mortgage but sometimes it costs more - it is kinda a gamble.

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adjustable loans

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interest rates on car loans are higher than houses, as cars get older they lose value as houses get older they gain value.

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car loans

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tightly regulated the amount of interest that banks could pay on deposits and could charge on loans.

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Banking act of 1933

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the end of this ended restrictions on interstate banking which led to a large number of mergers.

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deregualtion

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larger banks expanded by acquiring smaller banks. Some groups of smaller banks joined together to form larger, interstate operations.

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mergers

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benefits of mergers include: an increase in the number of bank branches

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benefits of mergers

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downsides include: banks becoming an oligopoly.

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downside of mergers

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this lifted the last restrictions that had prevented banks, insurance companies, and investment companies from selling the same products and competing with one another. Now banks could sell stocks, bonds, and insurance.

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Financial services act of 1999

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there were all these house that were only worth a fraction of the mortgage the people had paid for them.

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toxic assets

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also known as automated teller machines, these electronic devices allowed bank customers to make deposits, withdrawals, and transfers and check their account balances at any time without seeing a bank officer.

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ATMs

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cards that can be used like an ATM card to withdraw cash or like a check to make purchases

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debit cards

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cards that represent money that the holder has on deposit with the issuer, such as a department store.

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stored-value cards

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allow people to bank even when the bank is closed and to avoid waiting in line for simple transactions. Less expensive to process ATM transaction than transaction that involve a teller. Allow banks to provide services at more locations without constructing complete bank branch offices.

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Uses of ATMs

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credit card purchases involve getting a loan. Your money stays in your account until you pay your credit card bill. With credit cards if you do not pay your balance in full each month you pay interest and built up a big debt. Debit card you make an immediate payment, this makes it important to track your account therefore you known how much money is available in your account at any given time. You only spend the money you have.

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difference of debit and credit cards

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this form of banking allows customers who have accounts with a bank preform everything without walking into the bank.

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electronic banking

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information security and identity theft are related, high profile issues for the industry. This allows banks to amass large amounts of info about their customers.

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Challenges of electronic banking

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do stocks and bonds for business corporations

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investment bank

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an investment in debt. A legal contract where you provide an organization with money and they give back to you plus interest by a certain date. This is a better investment with little risk. You will also always be paid back even if the co. fails.

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bond

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you buy a place of ownership in that company. Bigger return in stocks but also more risk.

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stock

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very safe. You will always get paid back unless the gov. fails. Treasury bonds are the most secure.

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Federal government bonds

Econ Ch. 10 – money: it’s functions and properties

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