Unit 10
Money and Financial Markets
Video below: What $1 Trillion looks like
Class preparation
Read Ch. 10 "Money and the Financial Market"

Lecture topics
Functions of money
  • A medium of exchange - Money makes it easy to pay for things and conduct business. Without money you would need to "barter" for everything, which doesn't work very well.
  • A store of value - Money provides a convenient way for us to store value; to hold our assets. You could hold all your assets in the form of cars, houses, stocks, food, ammunition, and gold bars - but you would have to sell these things or "barter" them in order to go out and buy anything. In contrast, money is "liquid" and can be easily transformed into the things you need every day. Also - food can spoil and cars can rust, whereas money at least retains its 'face value'. (We will talk about inflation in a later chapter).
  • A unit of account - Just as we use feet and miles to measure distance, we use the U.S. dollar to measure the cost of good, services, and assets we buy & sell. If instead we all used seashells and cows and bales of tobacco for money, it would be much harder to assign a "value" to anything.
Modern money is "Fiat Money". (Fiat = a decree by the government). It's not backed up by gold. 
  • Paper money has value due to its supply and demand. If the government prints too much money, it isn't worth as much (the supply outstrips demand). The dollar's purchasing power has decreased significantly.
  • Paper money is backed by the Federal Govt's ability to tax.
Money Supply The U.S. Banking System
  • Fractional reserve banking - Banks are required to keep a small fraction of the deposits in the form of reserves. They can lend out the rest. This leads to a huge expansion of the money supply. Our classroom simulation/game will illustrate this principle.
  • Federal Reserve System - The central bank of the United States.
  • Commercial Banks - These traditionally accepted deposits and made loans to businesses and individuals
  • Savings & Loans - These were historically set up to accept savings deposits and make home loans to people
  • Credit Unions - These are cooperatives, owned by their members/customers
  • Today, all three accept checking and savings deposits and extend a wide variety of loans to their customers
Activity
Money and Banking classroom exercise
Objectives: 1) Simulate a society without money, and demonstrate the problems that occur with trade, 2) Create a bank in the 16th Century and demonstrate how it gets started and how it functions, and 3) Simulate a 16th Century bank with "fractional reserve requirements" and demonstrate how the supply of money grows as a result.

Homework problems
Ch. 10 "Chapter Review" questions #1-10 (10 questions, 100 points)

Analysis questions
Respond to the "Money & Banking" questions posted below (10 questions, 100 points)
U.S. Money Supply and Inflation
File Size: 139 kb
File Type: docx
Download File
Money & Banking homework questions
File Size: 16 kb
File Type: docx
Download File