Unit 4 Money (3-6-16)

Unit 4 Use's of Money

("Outershell')

I. Uses of Money

• Medium of Exchange - To barter/trade

• Unit of Account - Establishes economic worth in the exchange process

• Store of Value - Money holds its value over a period of time, whereas products do not

II. Types of Money

• Commodity Money - Gets its value from the type of material from which it is made. EX: Gold/Silver coins

• Representative Money - Paper money backed up by something tangible that gives it value EX: IOU

• Fiat Money - Money because the gov't says so EX: US Money

III. Characteristics of Money

• Portable - Money is portable

• Durable - Money is durable

• Scarce - Bills

• Divisible - Dollar - breaks down

• Acceptable - Everywhere in [US]

• Uniform - Everywhere you go

IV. Money Supply

• M1 [75% most liquid] <- (easy to convert to cash) - (Currency) [cash/coins] (checking accounts) -> Checkable deposits/Demand deposits + Travelers checks

• M2 [Not as liquid to convert to cash] - Consists of M1 money along w/ saving accounts, common market accounts, and deposits held by banks outside of US.

• M3 [withdraw early = penalty] - Consists of M2 money + Certificates of Deposits (CD's) Held by private institutions