Money is any asset that can be used to purchase goods or services
-Three Types of Money

• Commodity Money - Money that has value in itself 
• Representative Money - Represents something of value 
• Fiat Money - Money because the gov't says so

Six Characteristics of Money

• Durability
• Portability 
• Divisibility 
• Uniformity
• Limited supply
• Susceptibility 

Money Supply - All the money available in the US economy

M1 Money

• Liquid Assets (Liquidity) - Easy to convert to cash 
• Cash
• Currency
• Checkable or demand deposits 
• Traveler's Checks 

M2 Money 

• M1 Money + Savings Acct. and Money Market Accts. 

Purposes of Financial Institutions:

• Store money
• Save money
• Loan money

They Loan Money for Two Reasons: Credit cards and mortgages

-Four Ways to Save Money

• Savings account 
• Checking account 
• Money market account
• Certificate of Deposit

Loans

• Banks operate on a fractional reserve system 

Interest Rates
Principal - Amount of money borrowed
Interest - Price paid for the use of borrowed money

• Simple interest - Paid on the principal
• Compound interest - Paid on the principal + accumulated interest

How to Calculate Simple Interest

I = P x R x T / 100
-P stands for Principal
-R stands for interest rate
-T stands for time
Five Types of Financial Institutions

• Commercial Banks
• Savings and loans institutions
• Mutual savings bank
• Credit unions
• Finance companies 

Investments 

• Redirecting resources that we would consume now for future purposes 
• Financial Assets - Claims on property and income of the borrower
• Financial Intermediaries - Institution that channels funds from savers to borrowers 

Three Purposes of Financial Intermediaries:

• Share risk 
• Provide Information 
• Liquidity - Returns 

Bonds:

• Loans or IOU's that represent debt that the govt or a corporation must repay to an investor
• Bonds are generally low-risk investments

3 Components of a Bond

• Coupon Rate - The interest rate that a bond issuer will pay to a bond holder 
• Maturity - Time at which payment to a bond holder is due 
• Par Value - Amount that an investor pays to purchase a bond and that will be repaid to the investor at maturity 

The Simple Interest Formula

v = (1 + r)^n x p

Compound Interest Formula

v = (1 + r/k)^nk x p

v = future value of $
p = present value of $
r = real interest rate (nominal rate - inflation rate) expressed as a decimal
n = years
k = number of times interest is credited per year

7 Functions of the FED

• It issues paper currency
• Sets reserve requirements and holds reserves of banks 
• It lends money to banks and charges then interest
• They are a check clearing service for banks
• Acts as a personal bank for the govt
• Supervises member banks
• Controls money supply in the economy