Unit 4 - Mar 6 (Money)

I. Uses of Money

• Mediums of Exchange -  can be used to trade/barter.
• Unit of Account - establishes economic worth.
• Store of Value - money holds its value over period of time.

II. Type of Money

• Commodity - gets value from the materials it is made from (gold/silver).
• Representative - backed by something tangible (paper $).
• Fiat - money because the government said so.

III. Characteristic of Money 

• Durability - last through many transaction (Can be used after washed).
• Portability - able to transport money in many ways (Wallet, purse, etc).
• Uniformity - even (All $5 looks the same).
• Divisibility - can divide bills into smaller units ($10 = two $5 bills)
• Scarcity - might not have money at that time (No change for a cashier).
• Acceptability - acceptable anywhere. 

M1 Money - 75% of $ circulation.

• Liquid - easier to convert to cash.
• Consists of :
• Currency - cash/coins.
• Checkable/Demand Deposit - checking account.
• Traveler's Check

M2 Money - 25% of $ circulation.

• Consists of :
• Savings Accounts
• Market Money Accounts
• CD - Certificate of Deposit.
• Deposits held by banks outside the U.S. + M1 Money.

How Banks and Thrifts (Savings & Loans institution) create money

•  Assets (own) = Liabilities (owed) + Net Worth.
•  Bank deposits are subject to a reserve requirement.
•  Reserve Ratio = reserve requirement / checkable deposit liabilities.
• Excess Reserve = Actual Reserve - Required Reserve.
• Assume 20% reserve requirement.
• Banks creates $ by 
• Lending excess reserves and destroy it by loan payments. 
• Purchasing bonds from the public also creates $.