Unit 4 - Money

March 3, 2015

Money is any assets that can be used to purchase any goods or services.

3 uses of money

• Mediate of exchange: Determining value
• Unit of account: Comparing cost 
• Store of value: How money can be keep

3 types pf money

• Commodity money: Money that has value of it self (Salt, Olive oil, Gold)
• Representative money: Represents something of value (IOU)
• Fiat money: It is money because government say so (paper currency, Coins)

6 characteristics of money

• Durability
• Portability
• Divisibility
• Uniformity
• Limitless supply
• Acceptability 

Money supply: All the money available in the US economy made out of

• M1 money: Liquid assets (easily to convert to cash) Cash, Currency, Checkable or Demand Deposits, Travelers checks
• M2 money: (not easily converted to cash) Saving accounts, Money market accounts

3 purposes of financial institution

• Store money
• Saving money
• Loaning money (Credit cards, mortgages) 

4 ways to save money

• Savings account
• Checking account
• Money market account
• Certificate of deposits

Loans: Banks operate in a fractional reserver system

• Keep a fraction in the bank and lend out the rest.

Interest rate

• Principal: The amount of money borrowed
• Interest: Price paid for the use of borrowed money
• Simple interest: Paid on the principle
• Compound interest: Paid on the principle + accumulated interest

5 types of financial institutions

• Commercial banks
• Savings and Loan institutions
• Mutual Savings banks
• Credit union
• Fiance companies

Investment: Redirecting resources that we would consume now for future purposes

• Financial assets: Claim on property & income of the borrower
• Financial intermediates: Its an institution that channels funds from savers to borrowers

3 Purposes 

• Share risk
• Provide Information
• Liquidity