Wednesday, April 10, 2013

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:
 

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