Step 21: Money, Money, Money (Start of Unit 4)

Money

- any asset that can be used to purchase any goods & services

Uses

1. Medium of exchange - determine value
2. Unit of account - how to compare prices
3. Store of value - how money can be stored

Types

• commodity - has value within itself, ex: salt, olive oil, gold
• representative - represents something of value, ex: IOU
• fiat - has value because the government says so, ex: paper money, coins

Characteristics

• Durability - how long it lasts
• Portability
• Divisibility
• Uniformity - same money throughout
• Limited Supply - is finite
• Acceptablity

Money Supply

-total value of financial assets available in the U.S. economy

• M1 - Liquid assets, liquidity (easy convergence to cash), coins, checkable deposits or demand deposits, traveler's checks
• M2 - Money not ready to be spent immediately, M1 + savings accounts + money market account

Purposes of financial institutions

Store Money

Save Money

• savings account
• checking account
• money market account
• certificate of deposit

Loan Money

• (banks operate on a fraction reserve system, which is where they keep a fraction of funds, & loan out the rest.)
• credit cards
• mortgages

Interest Rates

• Principal - amount of money borrowed

P=(I x 100)/R x T

• Interest - price paid for the use of borrowed money
• Simple Interest - paid on the principal

I = ( P * R * T ) / 100

P = Principal

R = Rate of Interest

T = Time

• Compound Interest - paid on the principal and accumulative interest

Types of Financial Institutions

• Commercial Banks
• Savings and Loans Institutions
• Mutual Savings Bank
• Credit Unions
• Finance Companies