Money

Money: any asset that can be used to purchase goods and services

3 uses of money:

1. as a medium of exchange (used to determine value)
2. unit of account (used to compare prices)
3. store of value (some people choose to hide their money vs the bank

3 types of money:

1. commodity money: has value within itself
2. representative money: represent something of value
3. Fiat money: is money because the government says so (paper currency, coins)

6 characteristics of money:

1. Durability (how long it lasts)
2. Portability (put it anywhere)
3. Divisibility (broken down)
4. Uniformity (money is the same)
5. Limited supply
6. Acceptability

Money supply: total value of financial assets available in the us economy 

M1 money:

-liquid assets (easily to convert to cash)

• coins
• currency (paper)
• checkable deposits or demand deposits (checks)
• traveler's checks

M2 money:

-M1 money + savings account + money market account

3 purposes of financial institutions:

1. Store money
2. Save money
3. Loan money (credit cards, mortgages)

4 ways to save money

1. savings account
2. checking account
3. money market account (higher interest rate)
4. certificate of deposit (CD) (get you a higher interest rate)

Loans: banks operate on a fractional reserve system which means they keep a fraction of the funds and they loan out the rest

Interest rates:
-Principal
-actual interest
  ▪️simple interest : paid on the principal
  ▫️formula: I = P x R x T/100
      ▫️I: simple interest
      ▫️P: principal
      ▫️R: interest rate
      ▫️T: time
▫️P= I x100/ R x T
▫️T=I x 100/ P x R
▫️R=I x 100/ P x T
  ▪️compound interest: paid on the principal + the accumulated interest
Interest: price paid for the use of borrowed money

Types of financial institutions
1. Commercial bank
2. Savings and loans institutions
3. Mutual savings banks
4. Credit unions
5. Finance companies

Investment: redirecting resources you would consume now for the future

Financial assets: claims on property and income of borrower

Financial intermediaries: institution that channel funds from savers to borrowers
3 purposes:
1. To share risk (diversification) spreading out investments to reduce risks
2. To provide information
3. Liquidity (returns) money an investor receives above and beyond the sum of money that was initially invested

Bonds you loan
Stocks you own

Bonds: are loans, Ious, that represent debt that the government or a corporation must repay to an investor
-generally long risk investment

3 components of a bond
1. Coupon rate (interest rate that a bond insured will be repaid to a bond
2. Maturity (time at which payment to a bond holder is due
3. Par value: amount that an investor pays to

Yield: annual rate of return on a bond if the bond were held to maturity

Time value of money: is a dollar today worth more than a dollar tomorrow?
Yes
Why?
-inflation and opportunity cost
-this is the reason for charging and paying interest

Time value of mont
V=future value of $
p=present value of $
r=real interest rate (nominal rate-inflation rate) expressed as a decimal
n=years
k=number of times interest is credited per year

Simple interest formula
V=(1+r)^n x p

Compound interest formula
V=(1 + r/k)^nk x p

Assume that inflation is expected to be 3% and that the nominal interest rate on simple interest savings is 1% calculate the future value of $1 after 1 year.
Step 1: calculate the real interest rate
Step 2: use the simple interest formula to calculate the future value of $1
=98 cents

Monetary equation of exchange
Formula: MV=PQ
M-money supply (m1/m2)
V-velocity of money (m1/m2)
P-price level (pl on the as/AD diagram)
Q-real GDP (sometimes labeled y on the as/AD graph


Functions of the FED
1. It issues paper currency
2. Sets reserve requirements and holds reserves of banks
3. It lends money to banks and charges them interest
4. They are a check clearing service for banks
5. It acts as personal bank for the government
6. Supervised member banks
7. Controls the money supply in the economy