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Bellringer • The United States government has decided to issue federal income tax rebates to taxpayers. What is the MOST LIKELY goal of these rebates? A) B) C) D) Increased consumer spending Increased transfer payments Reduction in the unemployment rate Reduction in the military budget Money and Banking Functions of Money 1. Medium of exchange – Money can be used for buying and selling goods and services (v. bartering) – Any item that sellers accept as payment for g/s is money 2. Unit of account/standard of value – Prices are quoted in dollars and cents provides us with a way to measure the relative value of g/s – helps to clarify opportunity costs (you know better what you are giving up v. what you are receiving) – record-keeping, profits/losses. Functions of Money 3. Store of value – Money allows us to transfer purchasing power from present to future. – It is the most liquid (spendable) of all assets – a convenient way to store wealth – must be imperishable and keep value over time Characteristics of Money 1. Durability – ability to last, withstand wear and tear 2. Portability – ability to be carried as well as transferred to another 3. Divisibility – ability to be divided into smaller units (waste of resources 4. Stability in Value – encourages saving, maintains purchase power 5. Acceptability – people will accept in exchange for g/s Types/Categories of Money 1. Commodity Money – item that has value of its own – e.g., gold, gems, etc. 2. Representative Money – has value b/c it can be exchanged for something else of value – e.g., bills of credit backed by specie 3. Fiat Money – gov’t decree says it has value (paper money) – “backed by the good faith and credit” of the U.S. gov’t REVIEW • Which of the following best illustrates the unit of account function of money? A) You list prices for candy sold on your Web site, www.sweettooth.com, in dollars. B) You pay for your NBA tickets with dollars. C) You keep $10 in your backpack for emergencies. D)None of the above is correct. REVIEW • Which of the following best illustrates the medium of exchange function of money? A) You keep some money hidden in your shoe. B) You keep track of the value of your assets in terms of currency. C) You pay for your double latte using currency. D)None of the above is correct. REVIEW • Commodity money is A) backed by gold. B) the principal type of money in use today. C) money with intrinsic value. D)receipts created in international trade that are used as a medium of exchange. REVIEW • Fiat money A) is worthless. B) has no intrinsic value. C) may be used as a medium of exchange, but is not legal tender. D)performs all the functions of money except providing a unit of account. The Money Supply • The money supply (or money stock): the quantity of money available in the economy • What assets should be considered part of the money supply? Two candidates: – Currency: the paper bills and coins in the hands of the (nonbank) public – Demand deposits: balances in bank accounts that depositors can access on demand by writing a check http://www.mundanebehavior.org/images/images-v2n2/diggs-atm http://www.globalmortgage.com/images/ROLLOVERS/cash.jpg http://www.crk.umn.edu/academics/Acct/CHECKS.gif http://lfd.uiuc.edu/misc/visitors/coins.jpg jpghttp://www.nassauboatcharters.com/travelerscheck Cash Coins Checks Travelers’ Checks http://www.cpaofc.com/images/mutualfunds.gif http://www.catlinbank.com/images/acct/WG-PASSBOOK.gif http://www.pinnbank.com/gifs/photo_moneymarket.gif http://www.historyteacher.net/images/EuroDollar.JP Savings Money Accounts Market Mutual Overnight Euro $ Funds = http://www.fnbi.com/media/special_CD_rate/special_CD_offer_03_1.gif Large Deposits of Large institutional CD’s $100,000 or money market more accounts Measures of the U.S. Money Supply • M1: currency, demand deposits, traveler’s checks, and other checkable deposits. M1 = $2.2 trillion (January 2012) • M2: everything in M1 plus savings deposits, small time deposits, money market mutual funds, and a few minor categories. M2 = $9.7 trillion (January 2012) The distinction between M1 and M2 will often not matter when we talk about “the money supply” in this course. NOTE: • Credit cards are not money, but their use involves short-term loans • Their convenience allows you to keep M1 balances low because you need less for daily purchases. REVIEW • Which of the following is not included in M1? A) currency B) demand deposits C) savings deposits D)travelers' checks REVIEW • Which of the following is included in the M2 definition of the money supply? A) credit cards B) money market mutual funds C) corporate bonds D)large time deposits What “backs” the money supply? • The government’s ability to keep its value stable provides the backing. • Value of money arises not from its intrinsic value, but its value in exchange for goods and services. – It is acceptable as a medium of exchange. – Currency is legal tender or fiat money. It must be accepted by law. (Note that checks are not legal tender but, in fact, are generally acceptable in exchange for goods, services, and resources.) • The relative scarcity of money compared to goods and services will allow money to retain its purchasing power. What “backs” the money supply? • Money’s purchasing power determines its value. Higher prices mean less purchasing power. • Excessive inflation may make money worthless and unacceptable. – Worthless money leads to use of other currencies that are more stable. – May lead to barter exchange system. • Maintaining the value of money – The government tries to keep supply stable with appropriate fiscal policy. – Monetary policy tries to keep money relatively scarce to maintain its purchasing power, while expanding enough to allow the economy to grow. What “backs” the money supply? • What about gold—didn’t it used to give money its value? – NO!!! This is a misnomer propagated by ignorant history teachers – Gold never gave value to money, instead it forced the gov’t to only print a fixed amount of money due to the limited amount of gold – As we know, printing more money causes the value of money to decline. If the gov’t can’t just print more money, it can’t cause inflation or the devaluation of the currency Video • Next, we will watch “A World of Money” and you will complete the video guide TOTD • Finally, for your TOTD you will read Ch. 13.2 and 13.3, take notes, and answer Section Review questions #2 & #3 Transitional Page Template Provided By www.animationfactory.com 500,000 Downloadable PowerPoint Templates, Animated Clip Art, Backgrounds and Videos