Money, Banking, Saving
and Investing
Economics Unit 3: Economic Institutions and Organizations
Money has 3 Basic Functions
1)Medium of Exchange
2)Standard of Value
3)Store of Value
Money as a Medium of
Exchange
• Money makes trade and
commerce easier to carry out
• Money is “legal tender” =
Dollars must be accepted for
payment for purchases or for
debt
Money as a Standard of Value
• Money allows us to
measure and compare the
value of all kinds of
goods and services using
one scale of value
Money as a Store of Value
• Money holds its value over time
• Or money holds its “purchasing
power” over time – or the quantity
of goods or services one can
purchase with a particular sum of
money.
Money has Six Main
Characteristics
1) Acceptability: people are willing to accept money in exchange for goods
or services
2) Scarcity: Money has to be scarce enough to be valued by buyers and
sellers
3) Portability: Money must be a convenient commodity to exchange
therefore it must be portable
4) Durability: Money must be able to handle the wear and tear of being
exchanged from person to person many multiples of times
5) Divisibility: Money must be able to be divided into smaller amounts
6) Uniformity: Money is easily understood to be the same value from dollar
to dollar
Money Vocabulary
1) Commodity Money – A good which has a value in trade is
used as money
2) Bank – A business which receives deposits and makes loans
3) Banknotes – A receipt issued by a bank for deposits made by a
banks customer. Deposits were to be repaid “on demand”
4) Commodity-backed banknotes – A banknote which can be
redeemed for a particular value in a commodity
5) Fiat Money – Money which is not backed by a commodity
but by the assurances of value given by the government which
issued the banknotes
What counts as money today?
1) Currency
2) Checkable deposits
3) Traveler’s checks
4) Savings Deposits
5) Time Deposits
6) CD’s
7) Money Market Accounts/Mutual Funds
The Money Supply
• There are two ways the
government measures the supply
of money in the economy:
1) M1
2) M2
Money Supply – Components
August 2013
M2
M1
DataPost
•
•
•
•
Savings Deposits
Time Deposits
Certain CDs
Money Market
Deposit
Accounts
• Money Market
Mutual Funds
• Includes M1
• Coin
• Currency
• Demand
Deposits
• Travelers Checks
($trillions, seasonally adjusted)
$12
$10
$8
Source: Federal Reserve Board
M2-M1
M1
$8.22
$6
$4
$2
$2.55
$2.55
M1
M2
$0
http://www.frbsf.org/education/teachers/datapost/index.html
FRBSF Economic Education Group
What’s NOT part of the
Money Supply
• Checks
• Credit Cards
• Debit Cards
The Banking System
• Banks are financial institutions
• Regulated by the government
• Provide a means for customers to store their
money securely
• Provide a range of services
• Act as financial intermediary between savers and
borrowers
• Provide liquidity of assets to customers
• Ease by which assets can be converted into cash
The Banking System
• Types of Deposits
1) Checkable deposits
2) Savings deposits
3) Time deposits
Rank the above in terms of their
“liquidity”
The Banking System
• Types of Loans
1)Commercial loans
2)Consumer loans
3)Mortgage loans
How do banks make a profit?
• Deposits
• Savers are enticed to deposit money with the bank by being paid
“interest” on their deposit
• Interest is the price (usually a percentage of the deposit) the bank
will pay you for the use of your money
• Loans
• Borrowers are enticed to borrow money from the bank with the
use of an acceptable rate of interest (but higher than the rate
given to savers)
• Banks use a portion saver’s deposits to fund these loans
• The difference in the interest rates = the bank’s profit
What allows banks to be able
to loan money?
• Banks are only required by the US
government to keep a portion (or fraction) of
their saving customers’ deposits on hand
• This is called the “fractional reserve system”
• The fractional reserve system is overseen by
the Federal Reserve System
The Federal Reserve System
The Federal Reserve System
• The Federal Reserve or “Fed” has an
important role in the banking system
1) Takes the place of a central bank
2) Holds the reserves of its members banks
3) Provides short term loans and cash to member banks
4) Clears checks between member banks
5) Links banks electronically
The Federal Reserve System
• Most important functions of the Fed are:
1) Managing the US banking system
2) Managing the US money supply
How?
• Changing member banks’ reserve requirement
• Issuing Federal Reserve Notes
• Buying/selling US government backed securities (“T-Notes” or
“Treasury Notes”)
The Federal Reserve System
• Let’s watch a cartoon!!!
The Federal Reserve System
How else to people
invest/save?
• Securities
• Stocks
• Bonds
• Mutual Funds
• By investing in securities, you expect to get a profit
or “return” on your investment
• EX: Interest – simple and compound interest
• Rate of Return – measurement of the change in
value of an investment over time
Types of Securities
• Stock
• A certificate which represents part
ownership in a business
• Stock holder is known as a “share-holder”
• Share-holders are often paid part of the
profits of the company (a “dividend”)
• Stock owners believe the value of the
company (and their stock!) will increase
Types of Securities
• Bonds
• A loan with a promised amount of interest
to be paid as well as the principal on a
specific date in the future
• Governments and corporations can issue
bonds
• Considered a bit less riskier than stocks,
especially US Treasury bonds
Types of Securties
• Mutual Funds
• A collection of securities chosen and
managed by a group of professional fund
managers
• Shares in mutual funds are usually bought
and sold just like stock in a corporation
• A little less risky than owning individual
stocks as mutual funds are usually a way to
diversify your investments
Let’s Review
• 3-2-1 Exit Slip
1) Write down and explain 3 characteristics of
money
2) Write down and explain 2 roles of the
Federal Reserve System
3) Write down and describe 1 type of security