Unit 4: Money

Uses of Money: 

• Medium of exchange: Trade or barter
• Unit of account: Establishes economic worth in the exchange process 
• Store of value: Money has its value over a period of time, where products may not  

Types of Money: 

• Commodity money: Gets it value from the type of material from which it is made
• Representative money: Paper money backed up by something tangible that it gives it value 
• Fiat Money: Money because government says it is money and that is used in the U,S 

Characteristics of money: 

• portable 
• durable
• uniform
• scarce
• acceptable 
• divisible  

Money Supply:

• M1 money: Currency Examples: cash, coins, checkable deposits/ checking account, traveler's checks, and demand deposits) 
• M2 money: consists of M1 money  + savings accounts and deposits held by banks held outside of the U.S
• M3 money: consists of M2 money + certificates of deposits, known as CD's 
• 75% of money in circulation and it mostly liquid because it easy to convert to cash  

Time value of money:

1. Is a dollar today worth more than a dollar tomorrow?  Yes 
2. Why? Opportunity cost and inflation. This is the reason for changing and paying interest.

Formulas:

Simple interest formula: v=  (1+r)^n * p 

Compound interest formula: v= (1+r/k)^nk *p 

• V= future value of money
• P= present value of  money
• R= real interest rate (nominal rate- inflation rate) expressed as a decimal  
• N= years
• K= # of times interest is credited per year

1. What happened to the quantity demanded of money when interest rates increase? Quantity demanded falls because individuals would prefer to have interest rate assets instead of borrowed liabilities
2. What happens to the quantity demanded when interest rates decrease? Quantity demanded increase, there is no incentive to convert cash into interest earning assets
3. What happens if price levels increase? 

   Money demand shifters:

   • Change in price level
   • Change in income 
   • Change in taxation that effects investments
4. How does money supply affect AD? 

money supply increases= decrease in interest rates, increase in investments, and decrease in AD

money supply decreases = increase in interest rate, decrease in investment, decrease in AD

Financial Assets vs Financial Liabilities 

• FA: assets such as stocks and bonds provide expected future benefits 
• FA:it benefits the owner, based upon the issue of the asset meeting certain obligations
• FL: liabilities incurred by financial asset to stand behind the issued asset  

Interest rate:

• price paid for a financial asset 

Stocks vs Bonds: 

Stocks: assets that convey ownership in a company(shareholder)

Bonds: promise to pay a certain amount of money + interest in the future