Unit 4 - Money

Uses of Money

• Medium of Exchange - Trade or barter
• Unit of Account - Estimate economic worth in exchange process
• Store of Money - Money holds value over period of time; products do not.

Types of Money

• Commodity Money - Value from material type from which it was made.
• Ex: Gold coins, silver
• Representative Money - Paper money that represents tangible things which gives value
• Ex: IOU
• Fiat Money - Value declared by government 
• Ex: U.S.  Money

Characteristics of Money 

• Portable
• Durable
• Uniform
• Scarce
• Acceptable
• Divisible

Money Supply

• M1 Money = Currency (Cash and coins); Checkable deposits/accounts; traveler's checks
• 75% of money; most liquid (convertible to cash)
• M2 Money = M1 money + Savings Account; deposits held by foreign banks
• Not as liquid
• M3 Money = M2 money + Certificate of Deposit (CD) 
• Early Penalty if drawn

Time Value

Is $ worth more today or tomorrow? TOMORROW

• Because opportunity cost and inflation -> charge and pay interest
• Simple Interest Formula = V = (1+P)^n x P
• Compound Interest Fornula = V = (1+(r/k))^(nk) x P
• V=Future value of $
• P = Present value of $
• r = Real interest rate as decimal
• n = years
• k = # of times interest is credited per year.