Chapter 10 Section 1 SSEMI1b Explain the role of money as a
medium of exchange and how it facilitates exchange.
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Use of money is a social custom Its role is to facilitate
exchange Money itself is any asset accepted as payment for goods or
services Without money we would barter like traditional societies
Although barter works it can be complex and inefficient
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1. Medium of Exchange: commonly accepted payment 2. Unit of
Account: standardized and easily measured 3. Store of Value: holds
purchasing power over time
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What are the 6 characteristics of money?
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On the island of Yap, large circular stones are used for money.
The main reason why this type of money serves its function as a
medium of exchange is because it is A very portable B highly
divisible C accepted as payment D prized in foreign
transactions
Durablelasts for an extended period Portableeasy to carry &
exchange Divisibleeasily broken into measurable units
Uniformsimilar in appearance and has a standard value ScarceNot
overly printed or in too great abundance AcceptedSociety is certain
that it has value
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Fiathas value because the government says so legal tender
Representative stands in for money IOU, silver certificate
Commodityhas other uses besides acting as money Tobacco, water
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Money supply all the money available in the economy This
includes money in and out of banks Liquidity refers to how easily
an asset can be turned into cash Federal Reserve tracks the amount
of money in circulation or in the economy
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Chapter 10 Section 3
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The Financial Systemvarious markets, players and institutions
that coordinate the channeling of funds between borrowers and
savers Borrowersdemand money from the system with the knowledge
that they will have to pay it back with interest Saverssupply money
to the system with the expectation that it will be paid back to
them with interest
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Investment Banksraise money for companies (perhaps even
nations) and manage wealth of private investors (merchant bank)
JPMorgan, Goldman Sachs Credit Unionscooperative lending for
specific groups Marshland, Teachers Commercial Banksoffer a wide
range of lending services to the public (retail bank) Bank of
America, United Community
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Banks serve several purposes: 1. Store Moneysafe and insured 2.
Vehicle for Saving variety of accounts available 3. Loansrenting
money at a cost 4. Creditform of deferred payment Principal is
amount owed Interest is cost of renting the principal
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FDIC preserves and promotes public confidence in the U.S.
financial system by insuring depositors identifying, monitoring and
addressing risks to the deposit insurance funds limiting the effect
on the economy and the financial system when a bank or thrift
institution fails
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Chapter 11 Section 1 A [financial] market is an aggregation of
what people think the future is going to be like. ~ Dan
Mathisson
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When a saver, or investor, makes a purchase on the financial
market they gain a financial asset AKA securities, these are claims
on a borrowers repayments and potential interest Most investors
will not meet borrowers, they will move through an intermediary
These are companies and institutions that offer financial
products
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Dealing with intermediaries offers 3 advantages: 1. Sharing of
risk institutions can diversify, or spread, an investors money out
into multiple investments to reduce risk 2. Access to information
Managers and companies provide portfolios and prospectuses that
explain companies profits, losses, products, etc. 3. Liquidity
Banks can offer a guaranteed return, or money back above what was
investedsomething more secure than giving money to a friend
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Investing generally refers to the use of resources or assets to
earn income or profit in the future There are many vehicles, or
instruments, for investment such as property, stocks or bonds,
savings, etc. Investing happens over the short or long term
Investors look for return or the ratio of money gained to lost when
searching for or evaluating opportunities
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Stock is a claim on part of a companys earnings as ownership
They are sold in shares, or portions (AKA equities) Owning stock
yields a profit 2 ways: 1. Dividendsa portion of a companys profits
paid to investors during the year 2. Capital gainsto sell a stock
for more than the price for which it was purchased
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Stock is purchased on a stock exchange a financial market An
individual opens an an account with a brokerage firm and can
purchase stock online Those trades are executed on the floor of a
physical market NYSE is Americas oldest and largest and located on
Wall Street, NYC
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Markets generally fluctuate constantly throughout a year or
even a day When stock prices steadily rise it is called a bull
market; steady fall is a bear market These prices are listed on
many different indices: NASDAQfavors tech companies S&P
500tracks 500 companies (more diverse) DJIA30 largest American
companies (Dow)
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Another common asset is a bondan IOU Investors loan money to a
corporation or government and are repaid, with interest, over a
period of time When full payment is due back to the investor, the
bond has matured How much the bond would pay if held to maturity is
its yield
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These and other complex financial products are traded on
financial markets Capital Markets offer lending for over a year
Money Markets offer lending for less than year Primary markets
allow on the original buyer to redeem payment Secondary markets
allow the asset to be resold
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Eric received a $2,000 bonus from his employer. He deposited
the entire amount in a one-year certificate of deposit with a
simple interest rate of 5%. When the CD matured, how much interest
had Eric earned? A $10 B $20 C $50 D $100