Unit 4 Money Exchange

3-20-17

Unit 4 Money Exchange

Barter System

• good and services are traded directly
• no money exchange

Money

• anything generally accepted in payment for goods and services
• money does not equal wealth and income
• wealth equals total collection of assets that store value 
• Income equals flow of earnings per unit of time
• can be used as

1. Medium of exchange: buys goods and services
2. Unit of account: measuring value of goods and services
3. Store value

Types of Money

• Representatives $
• something of value
• ex: IOU
• Commodity $
• something that preforms function of money and has alternative uses
• ex: Gold, salt, silver
• Flat $
• $ cause govt says so
• ex: paper, coin

Characteristics $

• durability, portability, divisibility, limited supply, uniformity, acceptability

3 Types of Money

• liquidity- ease with which an asset can be accessed and converted into cash

1. M1 (High Liquidity)- coins, currency, and checkable deposits (personal and corporate checking accounts which are largest compent of M1). AKA demand deposits. Generally money supply
2. M2 (Medium Liquidity)- M1 and savings deposits ($ market accounts), time deposits (CDs: certificates of deposit), and mutual funds below $100k
3. M3 (Low Liquidity)- M2 plus time deposits above $100k

Financial institutions

1. store money
2. save money

• savings acct., checking acct., CD, money market acct.

      3. loan money

• Interest- price paid for the use of borrowed money
• Principal- amount that you borrow

Types of Financial Intermediaries

• Commercial Banks
• savings and loans institution
• Credit Union
• Mutual Funds Companies
• Finance Companies

Financial System

• Assets- anything of monetary value owned by a person or business.
• Financial Asset- a paper claim that entitles the buyer to future income from the sellers.
• Physical Asset- claim on tangible object (Ex: car, house)
• If you go to your bank and take out loan 
• bank created Financial Asset, you have created a Liability
• Liability- requirement to pay money in the future (usually with interest)
• there are 5 major financial assets: loans, stocks, bonds, loan-backed securities, and bank deposits

Interest rates and Inflation

• The time value of money- A dollar is worth more today that it is tomorrow. You are losing money every second you are not investing.

Present vs. Future Value

• Future Value: If you invest (or lend) money to someone, it will compond (grow) according to the following equation: FV=PV(1+i)^t
• Present Value: amount of $ I need to invest new, in order to get some amount (FVS known) in the future. PV=FV/ (1+i)^N

Simple Interest Formula

• Let v= future value of $
• p= present value of $
• r= real interest rate (nominal-inflation rate) expressed as a decimal
• n= years
• k= # of times interest is credited per year
• simple interest formula
• v=(1+r) ^n X P

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