What is Money? Why is money worth anything… It’s just paper… right?

What is Money?

Why is money worth anything…

It’s just paper… right?

The Story of Og and Nug

• Two men living in caves, hence they are cave “men”

• Og is a great hunter

• Nug makes great spear points

• Each lacks the skill of the other– How can they solve this problem???

Barter

• Exchanging goods and services for other goods and services

• If the tradeoff is not beneficial to both parties (cost-benefit analysis) it will not take place

• This is voluntary exchange• It’s difficult to transport a lot of cows through

town…– Money derived from a need to make a medium of

exchange more portable.

Characteristics of Money

• Money’s characteristics are– It’s accepted as a medium of exchange– It’s portable– It’s durable– It’s stable in value– It’s scarce– It’s divisible

What has been used for money?

• Lots of items have been used as money through out history.– Shells– Salt– Beads– Rice– Gold

3 Functions of Money

• Store of Value• Keeps all of your worth in paper and

coin form. It “stores” the value of your work.

• Medium of Exchange• Allows one to trade currency for other

goods and services. It’s accepted in exchange for goods and services.

• Unit of Measure/Accounting• Tells us how wealthy we and others

are. Depending on how expensive something is, you can determine its worth/value.

Forms of money

• Legal Tender– Coins

– Paper currency

• Other forms– Checks

– Credit cards

– Debit cards

Role of Money in Trade

• Two parties use money to reach an agreement for trading a particular item or service

• Example: Target Store sells you a DVD for $9.99

Role of Money in Trade

• The more money you have, the more trading can be done

• The more value your money has, the more goods you can buy

• If the value of the American dollar decreases, that decreases your ability to trade

Inflation

• Question why can’t we just print more money if we need it?– Prices will go up in relation to the amount of

new money in the economy

Role of Money in Borrowing• Loans: A lender agrees to give a certain

amount of money to a borrower– In exchange, the borrow agrees to make

payments and pay interest• Interest: fee charged by lenders

Circular flow

Businesses

Payment for goods and services

Consumers

Sale of goods and services

Sale or rent of resources

Land, Labor, Capital, Entrepreneurship

Payment for use of resources.

Rent, Wages, Interest, Profit

Role of Money in Borrowing– Interest Rates depend on government

Monetary Policy• Reserve Rate: amount of money the FED requires

banks to keep (cannot loan out)• Higher the reserve rate, the higher the interest

rates

• Collateral: property of high value that you agree to give up if you default (don’t pay a loan back) (usually: cars, houses)

Role of Money in Borrowing• Credit Cards:

– Different types of cards• Some charge monthly user fees• Different interest rates• Different billing cycles

– Credit cards allow you to borrow money for a short period of time, but you end up paying higher interest than a longer term loan

• Usually interest rate depends on your credit worthiness and history

Role of Money in Investing• Your ability to invest depends on your monetary

situation– The more disposable income you have, the more

investing you can do

• Pension Funds– Fund set up by employers or government that will pay

out to you when you retire– Pensions are becoming more rare as businesses ask

employees to set up their own retirement

Role of Money in Investment

• Investing for the future– Mutual funds

• A middleman that pools all employees of one business together and buys stocks

• Mutual funds are safer than other stocks because they are cheaper to buy into and they are Diversified

– You will not lose all if one business goes under

Role of Money in Investment

• Investing money can be riskier than saving it in a bank, but it is also a bigger payoff