03/06/14 Concept of Money

• Uses of money
1. Medium of exchange- trade or barter.
2. Unit of Account establishes economic worth.
3. Store of value- Money holds its value over a period of time.
• Types of Money
1. Commodity Money- Gold and Silver coins because it gets its value from the material from which its made. 
2. Representative Money- Paper money backed by something tangible.
3. Fiat Money- It is money because the government says so.
• Characteristics of Money
1. Durability- Money lasts throughout many transactions because it is durable.
2. Portability- You can transport money in different forms. 
3. Uniformity- It is even, looks alike.
4. Divisibility- You can divide your bills into smaller units. 
5. Scarcity- You may not have specific bills.
6. Acceptability- Acceptable anywhere.
• M1 Money
• Currency of money (Cash, coins)
• Checkable deposits or demand deposits. a.k.a Checking accounts.
• Travelers check
• 75% of money comes from M1 Money. 
• M2 Money
• Consists of
• Savings account
• Money market accounts
• CD's (Certificate of Deposits)
• Deposits held by banks outside of the U.S.
• M1 Money
• 25% of money goes into circulation. 
• M1 money is more liquid, easily to convert from cash.
• M2 money takes longer to convert to cash.
• Balance sheet of a commercial bank
• Assets (Your Money)= Liabilities (Money you owe) + Net Worth
• Bank deposits are subject to a reserve requirement.
• Reserve Ratio= Commercial banks required reserves/ Commercial banks checkable - deposit liabilities.
• Banks cannot use all of their profit money.
• Excess reserves= Actual reserves - required reserves (Assumes 20% reserve requirement) - how much money banks are required to save.
• Banks create money by lending excess reserves and destroy it by loan repayment.  Purchasing bonds from the public also create money.