Money and credit, banking system, and monetary tools -...

1Topic 6 Worksheet
Money and credit, banking system, monetary tools. Use lesson 1 and lesson 4 of the Topic 6
3 functions of money
- medium of exchange (circulation of goods and services)
- unit of account (standard to set price)
- store of value (people can save it)
6 Characteristics of money
- durable
- portable
- divisible
- uniform
- limited
-acceptable (form of payment)
The value of money
- Commodity money ,
- consists of objects that have value in and of themselves and that are also
used as money
-Money that has a value a part of his use of money
- Representative money …
- makes use of objects that have value solely because the holder can
Exchange
- No value of its own, but can be exchanged for something of value. RM is in
limited supply because it represents a claim to some scarce resource such as gold
or silver. In and off between the late 1700s and 1971, the US used RM in the form
of gold or silver certificates that could be redeemed at a bank for gold or silver.
To prep for a sudden loss if faith in US money that could lead to a large scale
exchange of currency for these commodities, the gov maintained large reserves of
gold and silver
- Today the United States stopped issuing representative money, it has
issued…
- Fiat money “legal tender” an order or decree; it has value because a government
has decreed that it is an acceptable means to pay debts. Money that has value not
because it is a commodity or is tied to a commodity but because the gov declares
that it shall have value. The real value of the money is the economy: the goods
and services produced.

Money supply
Mo → M1→ M2→ M3 → L
In moving down the scale, the less liquidity there is
● The more time it takes to change into money
- M1
consists of cash and assets that can be directly converted into cash. The term demand deposits
refers to money in checking accounts
- represents money that people can gain access to easily and immediately to pay for goods and
services
- liquidity: ability to be used as, or directly converted into, cash
- M2
- consists of M1 assets plus funds that cannot be easily converted into cash
- additional M2 funds cannot be used as cash directly but can be converted to cash easily
- “near money”
- M1 + certificates of deposit + savings
*In talking of money supply (M2)
* coins notes and checking accounts (M1)
The Banking Institutions
- commercial banks
- (deposits, loans, services for business and since 1999 financial services like selling
investments such as stocks).
- Many state Banks are member of the Federal Reserve System. INsuresed by the FDIC
- chartered which means they are given the right to exist by the state gov. Or the fed
gov.
- immediately ensured by the Fed (and the FDIC)
- savings and loan associations
- similar to Savings Banks
- Mission is to support the construction, purchase, and improvement of home
- Savings and loan associations are also called thrifts because they originally enabled
"thrifty" working-class people - that is, people who were careful with their money - save