•Three uses of money:
- Medium of Exchange: it is used to determine value
-Unit of Account: need something where you can compare the costs of items.
-Store of Value: when you hide money
•Three types of money:
-Commoditie money: salt, olive oil, and gold
-representative money: represents something of value (IOU)
-Fiat money: money because the government says so (paper currency and coins)
•Six characteristics of money:
1) Durability: how long it lasts
2) Portability: take it and store wherever you go and want
3) Divisibility: being able to be broken down
4) Uniformity: all money looks the same
5) Limited supply
6)Acceptability
•Money Supply: all of the available money in the US economy
•M1 Money:
-Consists of liquid assets (liquid means easily converted to cash)
-Currency
- Coins
- Checkable deposits (checks)
- Travelers checks
•M2 Money:
- Consists of M1 money plus savings accounts plus money market accounts.
•Three purposes for financial institutions:
-store money
-save money
-loan money
•Two reasons to LOAN money:
-Credit cards
-mortgage
•Four ways to save money
-through savings account
-through checking account
-through money market account
-through certificate of deposit (CD)
•Loans: Banks operate on a fractional reserve banking system, which means they keep a fraction of the funds and loan out the rest.
•Two components of interest rate
•Principal: the amount of money borrowed
Interest: price paid for the use money
•Two types of interest:
-Simple:
-Compound: paid on the principle plus the accumulated interest
•Formula for simple interest
I= p•r•t / 100 (principal•rate of interest•time)
T= i•100/ p•r
P= i•100/ r•t
R= I•100/ p•t
•Types of Financial Institutions
-commercial banks
-savings and loans institutions
-mutual savings banks
- credit unions
-finance companies
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