Unit 4- Money

Money is any asset that can be easily used to purchase goods and services.

3 uses

• Medium of exchange
• Unit of account
• Store of value

3 types

• Commodity money-value within itself
• Representative money- represents something of value
• Fiat money- money because the government says so

 6 characteristics of money

• Durability
• Portability
• Divisibility
• Uniformity
• Limited supply
• Acceptability

Money supply- all of the available money in an economy

M1 money- liquid money

• Currency
• coins
• checkable deposits
• travelers checks

M2 money

• Consists of M1 money, savings accounts, and money market accounts

3 purposes of financial institutions

• Store money
• Save money
• Loan money

4 ways to save money

• Savings account
• Checking account
• Money market account
• CD (certificate of deposit)

Loans-banks operate on a fractional reserve banking system, which means they keep a fraction of the funds and loan out the rest

Interest Rates

• Principal- it is the amount of money borrowed
• Interest-price paid for the use of borrowed money
• Simple interest- paid on the principal
• Compound- paid out the principal plus the accumulated interest

Simple interest formula
I=P*R*T / 100

Types of financial institutions

• Commercial banks
• Savings and loan institutions
• Credit Unions
• Mutual savings banks
• Finance companies

Investment- redirecting resources that you would consume now for the future

Financial assets- claims on property and income of the borrower

Financial intermediaries- Institution that channels funds from sources to borrowers

3 purposes for financial intermediaries

• Share risk
• providing information
• liquidity

Bonds- loans or IOU's that represent debt the government or a corporation must repay to an investor

3 components

• coupon rate- it is the interest rate that a bond issuer will pay to a bond holder
• maturity- time at which payment to a bond holder is due
• Par value- the amount that an investor pays to purchase a bond and that will be re-payed to the investor at maturity

Yield- the annual rate of return on a bond if the bond were held to maturity

Is a dollar today worth more than a dollar tomorrow?

• Yes

Why?

• Opportunity cost and inflation
• This is the reason for charging and paying interest

Let v=future value of money
p=present value of money
r=real interest rate (nominal rate-inflation rate) expressed as a decimal
n=years
k=number of times interest is credited per year

The simple interest formula

• v=(1+r)^n *p

The compound interest formula

• v=(1+r/k)^nk * p

Monetary Equation of Exchange

• MV=PQ
• M=money supply
• V=money's velocity
• P=price level
• Q=real GDP