#45
Unit 4: Money, Banking,
Monetary Policy
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Unit 4: Warm Ups #46
Why Money? #47
Money and Banking System
What do the following words have in
common?
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Cheese
Dead Presidents
Dough
FEDS
Bones
Benjamins
Money and Banking
Go to Dillards and buy a winter coat—Try
to pay with a live chicken?
How about: 12 oranges, a Walrus tusk, a
coffee mug and a picture of your cousin?
Then, you try to pay with a picture of an
18th century politician printed on green
paper. What’s the difference????
Functions of Money
Money—Anything that people commonly
accept in exchange for goods and services.
3 Functions of Money:
– A medium of exchange
– A standard of value
– A store of value
Functions of Money
Medium of Exchange—is any item that
sellers accept as payment for goods and
services.
– Buyers know that sellers will accept money in
payment for goods and services.
– Restaurant workers are not paid in barbeque
sauce. $$$$
– Teachers not paid in pencils. $$$$
Functions of Money
 Standard of Value—Money provides people
with a way to measure the relative value of goods
and services.
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What is a TV worth? Bicycle? DVD player?
Helps consumers to compare prices
Helps clarify opportunity costs
Helps to compare businesses performance:
• Profit of 300,000 bags of rice
• Profit of 500,000 hamburgers
• Profit of $100,000
Functions of Money
Store of Value—2 things must be met
– Money must be nonperishable
– Money must keep its value over time
• If both conditions are met, people can accumulate
their wealth for later use.
Characteristics of Money
5 Major Characteristics of Money
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Durability
Portability
Divisibility
Stability
Acceptability
5 Characteristics of Money
Durability—the ability to be used over
and over again.
– Eggs? Gold/Silver? U.S. Dollars?
Portability—the ability to be carried from one
place to another.
– Small, lightweight
5 Characteristics of Money
Divisibility—the ability for money to be
divided into smaller units.
– Exact price comparisons can be made
Stability of Value—Must be stable in order
to encourage saving.
Acceptability—People are willing to accept
money in exchange for their goods/services.
Sources of Money’s Value
Commodity Money—An item that has
value of its own as a commodity and that
can be used also as money.
– Diamonds, gold, silver, even salt!
Representative Money—Has value because
it can be exchanged for something else of
value.
It has no intrinsic value. Bills that could be
redeemed for gold/silver/ (Specie)
Sources of Money’s Value
Fiat Money—Coin, paper money have
been decreed to have value by the
government.
– The value ultimately stems from
the citizens faith in the U.S. gov’t.
• Currency—Coins, paper bills,
• used for trading.
Money Supply 14.2
 M1—Is all the currency in circulation, value of
all travelers checks, all checking account
deposits, in banks.
 M2—In addition to M1, M2 includes money
market accounts, mutual fund shares, CD’s, plus
all money in savings accounts.
 M3 and L—Includes M2 plus all CD’s over
$100,000. Also includes, savings bonds.
Drive Through Fun!
Go to a drive through
Ask the cashier the
following question:
– Will you accept a federal
reserve note in payment for
the food?
If they say no, then explain
that federal reserve notes
are money
Forms of Money
 Coins and Paper Money—
– Coins minted by the U.S. Mint
– Bills printed by the Bureau of Engraving
Demand Deposits—Also known as checking
accounts.
Near Money—Assets such as savings accounts,
and time deposits.
 Near money because they cannot be immediately
used to buy goods or pay debts.
What is it? Money, Near Money?
Coins Interesting Facts
 Pennies:
– Content: 90% Zinc; 10% Copper
– Melted down: Penny worth @ 3 cents
 Nickels:
– Content 70% Copper; 30% Zinc
– Melted down: Nickel worth @ 8 cents
 Penalty for melting:
– 10 years in prison and big fine
– Cannot ship out of country > $100 in pennies/nickels
The Six Characteristics of Money
Durability
 Objects used as money must
withstand physical wear and
tear.
Portability
 People need to be able to take
money with them as they go
about their business.
Divisibility
 To be useful, money must be
easily divided into smaller
denominations, or units of
value.
Uniformity
 Any two units of money must
be uniform, that is, the same,
in terms of what they will
buy.
Limited Supply
 Money must be available
only in limited quantities.
Acceptability
 Everyone must be able to
exchange the money for
goods and services.