Unit 4: Money

I. Uses of $ 

• medium of exchange→to trade (barter)
• unit of account→established worth
• store of $→$ holding value over prd of time (store in bank)

II. Types of $

• commodity $→gold+silver coins (examples); goods→no physical $ transaction
• representative $→"IOU"; backed by something tangible (you can feel--physical)
• fiat $→ $ b/c govt says so

III. Characteristics of $

• durability→wash it
• portability→carry
• divisibility→combos of $ (coins for $20)
• uniformity→look alike
• scarcity→$2, $100 bill
• acceptability→accepted everywhere

IV. Money Supply

• M1 $→consists of currency (physical dollars+coins) in circulations, checkable deposits (aka checks aka demand deposits), and traveler's checks **use 75% of time
• M2 $→consists of M1 $ and savings accounts and money market accounts and deposits held by banks outside of U.S. **use 25% of time

Fractional Reserve System→process by banks of holding a small portion of their deposits in reserves and loaning out excess:

1. banks keep cash on hand (required reserves) to meet depositers' needs
2. banks must keep reserve deposits in vaults or @ Federal reserve bank
3. total reserves→funds held by a bank (TR=RR+ER or total reserves=required reserves+excess reserves)
4. banks can legally lend only to extent of excess reserves
5. reserve ratio=RR/TR

Significance of a Fractional Reserve System:

1. banks can create $ by lending more than their reserves
2. required reserves don't prevent bank panics b/c banks must keep RR (FDIC ensured)
3. Reserve Requirement→gives Fed control over how much $ banks can create

Function of Fed (Federal Reserve Bank):

1. control nation's $ supply through monetary policy
2. issue paper currency
3. serves as clearing house for checks (takes 3-4 days to leave account)
4. regulates banking activities
5. serves as a bank for banks (issue loans)

Balance Sheet→statement of assets and claims summarizing financial position of firm/bank @ some point in time (must balance)
**assets→what you own
**liabilities→what you owe
**Assets=Liabilities+Net Worth (claims of owners against firm's assets (necessarily not yours))

Example: