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Chapter 12 Money and Banking

Chapter 12 Money and Banking. Money. Anything that commonly accepted as a payment for goods and services. Types of Money. 1. Commodity Money- has value beyond its use as money (ie precious metals, cigarettes in prison)

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Chapter 12 Money and Banking

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  1. Chapter 12 Money and Banking

  2. Money • Anything that commonly accepted as a payment for goods and services

  3. Types of Money • 1. Commodity Money- has value beyond its use as money (ie precious metals, cigarettes in prison) • 2. Fiat Money- no intrinsic value… Has value only because the government says so (Cash is worthless in and of itself, or Justin Bieber)

  4. Functions of Money (leave space for each) • 1. Medium of Exchange • 2. Unit of Account • 3. Store of Value

  5. Medium of exchange • Any item sellers generally accept and buyers generally use to pay for a good or service

  6. Unit of Account • Standard unit in which prices can be stated and the value of goods/services can be compared • Society uses monetary units • U.S. dollars, Euros, Yen, etc. • Yardstick for measuring worth of goods and services

  7. Store of Value • Asset set aside for future use • Enables people to transfer purchasing power from now to the future • When inflation is low or non existent; risk-free storage of wealth

  8. Liquid • Assets that are quickly converted to cash • The more liquid an investment, the faster you can turn it into cash • Liquid = cash, checks, savings accounts • Non-liquid = 401k, IRAs, Real Estate

  9. Money Definitions (U.S.) • M1- Narrowest Definition of money • M1 = coins and paper money + checkable deposits + traveler’s checks • Includes all Checkable Deposits (accounts that checks can be drawn from)

  10. M2 • M1 + savings deposits + small time deposits (less than $100,000 with a fixed maturity date ex CDs) + Eurodollar deposits (overnight deposits)

  11. M3 • M2 + large time deposits + Eurodollar time deposits + other less liquid assets

  12. Types of Institutions • Commercial Banks- provide short-term financial capital to businesses and finance consumer purchases of automobiles and other durable goods • Thrift Institutions- Savings and Loans (S&Ls), mutual savings banks, and credit unions • Mostly use these funds to finance mortgages

  13. 2011 Figures • Roughly $13.9 trillion in US currency circulating throughout the world

  14. Value of the Dollar • Divide 1 by the price level expressed as an index number (in hundreths) • Ex. Price index is 120 (1.20) • V = 1/1.2 • V= .833

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