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Economics
MoneyMoney
Commodity MoneyRepresentative Money
Fiat Money
Economics
We use it every day but what is money?
Economics
Money
• Money is a medium of exchange, a unit of account, and a store of value.
• As a medium of exchange, money measures value during the exchange of goods and services.
• What is the value of a sweater?
Economics
Money, Again
• As a unit of account, money is a way to compare the value of goods and services.
• A more expensive sweater is considered more valuable than a cheaper sweater.
• Finally, money is a store of value. Money holds its value even if it is not used though inflation affects money.
Economics
And if we don’t spend it today, that’s O.K., too. Money is a store of value. It keeps its value unless inflation occurs.
But I don’t have to tell you aboutinflation. You know all about rising prices.
Economics
Not All Money is the Same
• Commodity money can be used as money but also has value in itself.
• An example of commodity money is salt. Salt was once used in some societies as money.
• Salt could be used as money or eaten.
Economics
Representative Money
• Representative money is another type of money.
• An example of representative money is an I.O.U.
• The paper that the I.O.U. is written on can be exchanged for something valuable.
Economics
Our dollarswere oncebacked bygold. You
could exchange a
dollar for gold.
Economics
Fiat Money
• Fiat money is our money today.
• Our money is money because the government states that it is an acceptable means to pay debts.
• In other words, its money because the government says so.
Economics
Six Characteristics of Money
• There are six characteristics of good money. Money should be portable, divisible, durable, uniform, accepted, and have a limited supply.
• Too much money in circulation means less value.
Economics
Questions for Reflection:
• What is money?• Explain each of the three functions of
money.• Provide an example of commodity money.• What is representative money?• How does fiat money differ from
commodity money and representative money?
Economics
The History of American Banking
BankFederalists
Anti-FederalistsFederal Reserve Bank
Economics
A bank is an institution for receiving,keeping, and lending money.
Economics
Today, the Federal Reserve Bank overseesbanking in the United States. It was not
always this way.
Economics
There was a time when banks were notregulated by the Federal government.
Sometimes bankers made poor decisionsthat bankrupted their banks.
Economics
Federalists vs. Anti-Federalists
• At the founding of the nation, Federalists wanted a strong, central bank.
• Anti-Federalists did not. Anti-Federalists believed that a strong, central bank would only loan to the rich and powerful.
• Federalists and Anti-Federalist just didn’t agree.
Economics
Then There Was None
• Sometimes the Anti-Federalists won.
• Whenever a central bank was lacking, there was frequently chaos in banking. Banks often made too many bad loans.
• When enough people defaulted or did not pay back their loans, the banks went bankrupt.
Economics
You see, banksmake money byloaning money.
However, if banksloan money topeople who cannot repaytheir loans,
then banks losemoney.
Economics
The Federal Reserve Bank• Eventually, it became clear that the nation
needed a strong, central bank to oversee banking in America.
• A strong central bank could monitor banking in the country and make sure that banks did not make too many loans.
• A strong, central bank could hold bankers to higher standards thereby protecting consumers.
Economics
The Fed
• The Federal Reserve Bank is commonly referred to as the “Fed.”
• The Federal Reserve Bank can make loans to banks, raise or lower interest rates, and require banks to hold adequate reserves.
• The Fed helps banks across America.
Economics
The Fed monitors banking in every partof the United States.
Economics
Questions for Reflection:
• What is a bank?• What was the primary difference between
the Federalist party and the Anti-Federalists?
• Why did chaos occur in banking when a strong, central bank did not exist in the country?
• What is the Federal Reserve Bank?
Economics
Banking TodayM1 and M2
PrincipalInterestDefault
Economics
The money supply is all the moneyavailable in the United States.
Economics
M1
• The money supply consists of M1 and M2.
• M1 is money that people can easily use to pay for goods and services.
• Cash and checks are examples of M1.
Economics
Checks are examples of M1. M1 hasliquidity. Liquidity means it can be
used easily as money.
Economics
M2
• M2 consists of M1 and several other assets.
• M2 includes savings accounts and mutual funds.
• These assets must be converted to cash before they are used.
Economics
A bond must be converted to cashbefore it can be used.
Economics
Interest
• When money is deposited in a bank, the customer receives interest on the money.
• A person who borrows money must pay interest.
• Interest is the price of borrowed money.
Economics
Default
• When a person fails to pay back a loan, he has defaulted on the loan.
• Defaulting on a loan leads to bad credit and higher interest rates in the future.
• By defaulting, a person ruins his reputation for repaying a loan.
Economics
Defaulting on a loan leads to bad creditand higher interest rates in the future.
Economics
Principal and Interest
• There are two parts to any loan: principal and interest.
• The principal is the actual amount borrowed.
• The interest is the money a customer pays above the principal for the opportunity to borrow money.
A mortgage is a loan on real estate.
Economics
By learning the language of banking,a person makes better choices.
Economics
Questions for Reflection:
• What is the money supply?• How does M1 differ from M2?• Provide an example of an object that has
liquidity.• Why does it harm a person to default on a
loan?• What does a loan consist of?• How does principal differ from interest?