⭐️ Unit 4 Money

3 Uses of Money:
-Medium of Exchange: Serves to trade one product for another
-Unit of Account: Establishes economic worth
-Store of Value: Money holds its value over a period
of time whereas products may not.

3 Types of Money:
1. Representative Money: Paper money that is backed by something tangible that gives it value.
Ex. IOU

2. Commodity Money: Gets its value from the type of material from which it is made.
Ex. Gold or Silver

3. Fiat Money: It is money because the government says so.
Ex. Paper money

7 Characteristics of Money:
-Durability
-Portability
-Divisibility
-Acceptability
-Uniformity
-Scarcity
-Limited Supply

Money Supply
M1 Money
Currency
Checkable Deposits
Traveler's Checks
Liquidity (Easy to convert to cash)

M2 Money :
Consists of M1 Money
Savings Accounts
Money Market Accounts

M3 Money: 
Consists of M3 Money
Certificate of Deposit (CD)

Balance Sheet: Summarizes the financial position of the bank at a certain time.
Value of assets must equal liabilities at all times!

Assets:
1. Required reserves (RR)

2. Excess Reserves (ER)

3. Bonds

4. Loans

5. Property

Liabilities:
1. Demand Deposits

2. Owners Equity (stock)

3. Net Worth (money earned)

Money Creation:
Putting money into circulation (2 ways)

1. When the FED buys bonds from the public or from a financial institution. (Open Market Operation).

2. When the banks make loans to the public

Money supply is increased when banks make loans.The more loans banks make, the more money there is in circulation.
A bank can loan any amount that is in excess of its required reserves.
The banking system can create loans in multiples of an original loan
Reserves of total reserves are the amount of deposits that a bank has accepted but not loaned out.
Required Reserves - the amount a bank must keep on hand by law
Required Reserve Ratio determines this amount

Functions of the FED:

Issues paper currency

Sets reserve requirements and holds reserves of banks

Lends money to banks and charges them interest

They are a check clearing service for banks

It acts as personal bank for the government

Supervises member banks

Controls the money supply in economy.

Types of Multiple Deposit Expansion Questions
Type 1: calculate the initial change in excess reserves (amount a single bank can loan)
Type 2: calculate the change in loans in the banking system
Type 3: calculate the change in the money supply

Type 4: calculate the change in demand deposits