Money

Uses of money

Medium of exchange

-borrow and trade 

Unit of account

-it establishes economic value 

-(cake for lessons)

Store of value

-money holds it value over a period of time where as products may not

Types of money

Commodity

-it gets its value from the type of material from which it is made

-(gold and silver coins)

Representative money

-it is paper money backed by somthing tangible that gives it value

Fiat money

-Money because government says so

Characteristics of money

1. Divisible

2. Portable

3. Uniform

4. Acceptable

5. Scarce

6. Durable

Money supply

M1 Money

-75% of money from circulation

-most liquid (easy to covert to cash)

Currency 

.Checkable deposits

.Demand deposited

.Travelers check

M2 Money

-M1 money, Savings account, and Deposits held by banks outside of the U.S

M3 Money

-M2 money and Cirtificate of Deposited (C.D)

-C.D: pull money by X ammount of time

Time value of money

Is a dollar today worth more than a dollar tomorrow? Opportunity cost and inflation reason for charging and paying Intrest

Let V = future value of money

      P= present value of money

      r= real intrest rate (nominal - inflation rate expressed as a decimal)

     n= years

      k= number of times intrest is credited per year

Simple intrest formula

V=(1+r)^n • p

Compound intrest rate

V= (1+(r/k)^nk • p

Demand for money has an inverse relationship between nominal interest rates  and the quantity of money demanded

What happens when quantity of money when interest rates increase?

-quantity demanded falls because individuals would prefer to have interest earning assets instead kf borrowed liabilities 

What happens to the quantity demanded when interest rate decrease?

-quantity demanded increases. There in no incentive to convert cash into interest earning assets

Financial sector

Financial asset- something that you own

Financial liability -something that you owe

Interest rate -cost of borrowing money

Stocks-share of a company

Bonds- lend money to the government and how much the owe you with intrest

What banks do

A bank is a financial intermediary

-uses liquid assets (i.e bank deposits) to finance the investments of borrowers

fractional reserve banking 

-A system in which depository institutions hold liquid assets less than the amount of deposites 

Can take form of

-currency in bank vault

-bank reserves-deposites held at the federal reserve

T account (balance sheet)

-statements of assets and liabilitys

Assets

-items to which the bank holds legal claim

-the uses of funds by financial intermediaries 

Liabilities

-the legal claims against a bank

-the sources of finds fir fianacial intermediary