Unit 4 (MONEY)

What would happen if we had no money?

• The barter system: goods and services are traded directly. No money is exchanged.
• Money is anything that is generally accepted in payment for goods and services.
• Money not the same as wealth or income
• Wealth is the total collection of assets that store value
• Income is flow of earnings per unit of time

Money can be used as a

• Medium of exchange
• buy goods and services
• Unit of account
• measuring the value of goods and services
• Store of value

3 Types of money

1. Representative
• represents something of value
• IOU's 
2. Commodity
• Something that performs the function of money and has alternative uses
• Salt, Gold and silver
3. Fiat money
• serves as money but has no other important uses
• paper money
• coins

6 characteristics of money

1. Durability
2. Portability
3. Limited supply
4. Divisibility
5. Acceptability
6. Uniformity

3 Types of money

• Liquidity - money converted to cash
• M1 - Coins, currency, and check-able deposits.
• M2 - M1 plus savings deposits, time deposits and mutual funds below $100k.
• M3 - M2 plus time deposits above $100K

Purpose of Institutions

• Store $
• Save $
• Savings acct.
• Checking acct.
• CD
• Money market acct.
• Loans $
• Interest - prices paid for the use of borrowed money
• Principle - amount that you borrow

Types of financial intermediaries

• Commercial banks
• Credit Union
• Svaing and loans institutions
• Finance companies
• Fund companies

The financial system

• Assets - anything of monetary value owned by a person or business
• Financial - a paper claim that entities the buyer to future income from the seller
• Physical - a claim on a tangible object
• Liability - is what you owe
• 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 than it is tomorrow. You are losing money every second you are not investing it.
• RIR - Real = nominal - expected inflation
• NIR - Nominal = Real + expected inflation
• RIR - intended return on an investment for lending. True cost of borrowing

Present vs. Future value

• Future value - if you invest money to someone, it will compound according to FV = PV (1+i)^t
• Present value - is the amount of money need to invest now, in order to get some amount in the future. PV= FV/(1+r)^n

Time Value of Money

• v=(1+r)^n X p
• v=future value of $
• p= present value of $
• r=real interest rate (non-inf) decimal
• n= years
• k= number of times interest is credited per year
• v=(1+r/k)^nk X p