Econ Ch14 Money & Banking

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Econ Ch14 Money & Banking

  1. 1. Chapter Money & Banking 14
  2. 2. Objectives: <ul><li>list the types of money </li></ul><ul><li>identify the characteristics of money </li></ul><ul><li>list the 3 basic ways economists measure the money supply </li></ul><ul><li>calculate how the money supply grows using the simple money multiplier </li></ul>
  3. 3. Types of Money <ul><li>Money: item used to buy goods and services </li></ul><ul><li>Commodity Money: money with an alternative use </li></ul><ul><li>Representative Money: money backed by something valuable </li></ul><ul><li>Fiat Money: money that is valuable because the Government backs it </li></ul><ul><li>Legal Tender: paper money and coins used within a nation </li></ul>
  4. 5. Roles of Money: <ul><li>Medium of Exchange: way of buying stuff </li></ul><ul><li>Store of Value: holds the same value over time </li></ul><ul><li>Unit of Account: consistent way of understanding prices </li></ul>
  5. 6. What makes Money Valuable? <ul><li>Widely Accepted </li></ul><ul><li>Holds Value </li></ul><ul><li>Durable </li></ul><ul><li>Portable </li></ul><ul><li>Divisible </li></ul>
  6. 8. The Money Supply M1 + M2 + retirement accounts and other assets that are difficult to convert to cash Even less liquid M3 M1 + savings accounts Broader measure M2 Currency in circulation and traveler’s checks Transactions money-liquid assets M1 Example Definition Type of Money
  7. 9. How Banks Work Banks use your deposited money to make loans
  8. 10. Simple Money Multiplier: = Deposit Required Reserve SMM SMM x Excess Reserve = $
  9. 11. SMM Example: = $100 20 5 5 x $80 = $400

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