Money

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

Use of Money :

1. as a medium of exchange
• used to determine value
2. unit of account
• something that will compare cost
• ex : grocery shopping
3. store of value
• hiding money in a shoe box ( no interest )
• bank ( interest )

Types of Money :

1. Commodity Money
• has money value within itself
• ex : salt, olive oil, gold
2. Representative Money
• represents something of value
• I.O.U ( pay back, paper is worthless )
3. Fiat Money
• money because the government says so
• paper currency ( dollar / notes ), coins

"Currency is money, but money is not currency"

 Six Characteristics of Money :

1. Durability - how long it can last
2. Portability - can be taken anywhere
3. Divisibility - can be broken down
4. Uniformity - it all looks the same ( except with updated ones)
5. Limited Supply
6. Acceptability

Money is backed by Fiat Money

Money Supply :

- all of the available money in the economy

M1 Money :

• Liquid assets ( Liquidity )
• easily to convert to cash
• currency ( paper )
• coins
• checkable deposits / demand deposits ( checks )
• traveler's checks ( safe )

M2 Money :

• consist of M1 Money + Savings Account + Money Market Account
• Savings Account, not as easy to withdraw as M1 Money
• Money Market Account, if withdrawn, you will be penalized from your own account

Three Purposes for Financial Institution :

1. Store Money
2. Save Money
3. Loan Money
1. for credit cards
2. for mortgages

Four Ways to Save Money :

1. through savings account
2. through checking account
3. through money market account
4. through certificate of deposit ( CD )

• Number 3 and 4, these way gives higher interest rate

Loans :

- banks operate on a fractional reserve banking system, which means they keep a fraction of the funds and loan out the rest

- banks make money through loans

• Interest Rate
1. Principal - amount of money borrowed
2. Interest - price paid for the use of borrowed money
• Two Types of Interest :
1. Simple Interest - paid on the principal
• I = ( P * R * T ) / 100
• P = Principal
• R = Rate of Interest
• T = Time
2. Compound Interest - paid on the principal and accumulative interest
• Formulas :
• Time = ( I * 100 ) / P * R
• Principal = ( I * 100 ) / R * T
• Interest Rate = ( I * 100 ) / P * T

Types of Financial Institutions :

1. Commercial Banks
2. Savings and Loans Institutions
3. Mutual Savings Bank
4. Credit Unions
5. Finance Companies