3 uses
- As a medium of exchange
- Used to determine value
- Unit of Account
- You need something to compare cost to
- Store Value
- In a bank it earns interest, at home its the same value
- Commodity Money
- Salt
- olive oil
- gold
2. Representative Money
- Represents something of value
- IOU - pay back worthless paper
3. Fiat Money
- Money because government says so
- Paper currency
- coins
Currency is not the same as money
All money is not currency
6 Characteristics of Money
- Durability (last long)
- Portability ( take it everywhere)
- Divisibility (Broken down) ex(1 dollar is 10 dimes)
- Uniformity (looks the same, updates)
- Limited supply
- Acceptability
- All the available money in the economy
M1
- Consists of LIQUID ASSETS
-Currency (paper)
-coin
-check-able deposits (checks)
-Travelers Checks
M2
- Consists of M1 Money + Savings Accounts + money market accounts.
3 Purposes for financial Institutions
- Store Money
- Save Money
- Loan Money- Credit card/Mortgage
4 Ways to Save Money
- Savings Account
- Checking Account
- Money Market Account
- CD certificate of Deposit
3+4 Higher interest rate.
Loans
Banks operate on fractional reserve bank system
which means - they keep a fraction of the funds, and they loan out the rest
Interest Rate
Principal- amount of money borrowed
Interest- price paid for the use of borrowed money
- simple interest- paid on the principal
- compound interest- paid on the principal + the accumulated Interest
Formulas
P- Principal
R- rate of interest
T- time
Simple Interest
I= P x R x T/ 100
Time
T= I x 100/ P x R
Principal
P = I x 100/ R x T
Interest Rate
R = I x 100/ P x T
Types of financial Institutions
- Commercial banks
- loans and saving institutions
- mutual savings banks
- credit unions
- financial companies
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