UNIT IV; Money Uses, Types, Characteristics & Supply
UNIT IV; Money Uses, Types, Characteristics & Supply
Uses of Money (3)
1. Median of exchange:
bartering or trading
money can be used as means for comparing the values of goods and services (comparing the monetary value assigned). Money allows us to compare similar offers for goods and services to determine the best value. Example is buying in bulk and paying less for item
3. Store of value:
function of an asset that can be saved, retrieved and exchanged at a later tine, and be predictably useful when retrieved. Most common in modern times is money, currency or commodity such as metal. Deals with the cost of a dollar. Example would be saving your money at home with applied interest, rather than keeping cash in a piggy bank at home that looses value. The value money maintains over time.
Types of Money (3)
1. Commodity money:
Commodity: a raw material or agricultural product that can be bought and sold such as copper or coffee.
Example would be gold and silver, a product or item whose value comes from a commodity of which it was made.
2. Representative money:
Example would be IOU's. An item such as a token or piece of paper with no exact value but can be exchanged for something with value for example a token traded for gold.
3. Fiat money:
Has value just because the government says so, the government assigns the value.
Characteristics of Money (6)
1. Durability:
An example would be that a dollar in the washer, is still a dollar after being washed. If the dollar is ripped it can be taken to the bank and exchanged if all the pieces are there, even if it has fecal matter. A long trip to a market threatens the fatigue of a cow, but does not threaten the value of a dollar bill. Bills can be replaced easily if worn out.
2. Portability:
Money can be carried in any way anywhere. An example would be women carrying their money in their bras. Money placed in pockets, socks, and even underwear.
3. Divisibility:
A 20 dollar bill can be split into 2 ten dollar bills, cows for example are not divisible this way. It is a unique characteristic of money, and will have same value no matter how it's divided between bills.
4. Uniformity:
All bills should have uniform appearance. An example would be that all 20 dollar bills are the same size and shape and share the same characteristics of appearance.
5. Scarcity:
In order to maintain it's value, money must have a limited supply. Money will not always be there. The more money there is circulating, the less value it has. Money supply is monitored by the Federal Reserve so that money maintains it's money over time.
6. Acceptability:
Example would be that not everyone will let you pay your bills to them in the currency of cows, but everyone accepts money. The U.S. government protects your right to use U.S. currency to pay your bills. Not every place accepts cash, some places make you pay card only due to counterfeit of false dollar bills.
Money Supply
M1
cash
coins
currency
travelers checks
demand or check-able deposits (the biggest fraction/ 75% of M1)
M2
M1 + savings account (like a checking account but you cannot actually write checks)
very liquid
M3
M2 + money market account + DDCD demand or checkable deposits + CD's certificate of deposit
very liquid
very liquid
Liquidity: A measure of how easy an asset can be convert to cash.
CD's: certificate of deposit:
demand or checkable deposit: a type of savings account that gives higher interest rate than normal savings accounts but requires money to not be withdrawn for certain period of time.
DDCD: demand deposit or checkable deposit: include checking, savings and money market accounts.
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