MONEY

MONEY

THE FUNCTIONS OF MONEY:

Medium of Exchange 

    Serves to trade one product for another

 

 Store of Value

     Money hold its value over a period of time

Unit of Account

      Establishes economic worth

TYPES OF MONEY:

Commodity Money

  Get its value from the type of material that its made with

   ex: gold and silver

Representative Money

  Paper that its backed by something tangible, that gives it value

Fiat Money

  "Money because the government says so"

CHARACTERISTICS OF MONEY:

  

 Durability

    

 Portability

 Divisibility

 Uniformity

  

 Scarcity

 Acceptability

 Limited Supply

MONEY SUPPLY:

  

  M1 MONEY:

   It consists of currency in circulation

   Ex: cash and coins

  "Liquidity" is easy to convert to cash

   Checkable Deposits

   Checking accounts demand deposits

   Traveler's checks 

M2 MONEY:

  Consists of M1 money + savings accounts + money market accounts

M3 MONEY:

   Consist of M2 money + Certificates of Deposits (CD)

TIME VALUE OF MONEY:

  "v"= future value of money

  "p"= present value of money

  "r"= real interest rate (nominal rate - inflation rate)

  "n"= years

  "k"= number of times interest is credited per year

Simple Interest Formula:

  v= (1+r)^n *p

Compound Interest Formula:

v= (t +r/k)^nk * p

A Balance Sheet summarizes the financial position of the bank at a certain time. The value assets MUST equal the value of claims. Claims on a balance sheet is divided into two groups.

What you spend v. What you bring in

Things found in Liabilities:

- DD

- Owner's Equity

- Net Worth 

Things found in Assets:

- RR (Requires Reserves)

- ER (Excess Reserves)

- Loans

- Property

- Bonds