Money is a medium of exchange, a unit of account, and stores value.
6 Characteristics:
Commodity Money: objects that have value in themselves
Representative Money: objects that have value since the holder can turn them in and get something of value from them
Fiat Money: money that a government has decreed as an acceptable means to pay off debt.
Fractional Reserve Banking: Systems that banks use to loan out money were they loan out a fraction of the money and the rest they keep in a reserve.
6 Characteristics:
- Durability: it has to be able to stand physical wear and tear
- Probability: you have to be able to carry it around and exchange it easily with other people
- Divisibility: you have to be able to break it down into smaller amounts
- Uniformity: it all has to be the same: it has to be counted and measured accurately
- Limited Supply: there has to be a regulated amount of money and it cannot be in huge supply or anyone can pick it up
- Acceptability: everyone has to use it
Commodity Money: objects that have value in themselves
Representative Money: objects that have value since the holder can turn them in and get something of value from them
Fiat Money: money that a government has decreed as an acceptable means to pay off debt.
Fractional Reserve Banking: Systems that banks use to loan out money were they loan out a fraction of the money and the rest they keep in a reserve.
Example: Paul works as a car sales man and this week was a good month. His commission that he earned selling cars was $100,000 and he deposited it into his bank account. His bank holds 20% of his money in the reserve, however they loan out the rest of the money to Sam who wants to buy a new car. He goes to the bank and the bank loans him $80,000. Sam buys the car from Jack and Jack deposits the money into his bank. The process:
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How banks make money:
Interest vs. Principle: Interest is the price a borrower pays to borrow the money while principle is the amount of money one borrows.
- Money enters either through deposits from customers, interest from borrowers, or fees for services
- Money stays in the bank in the reserves
- Money leaves the bank from interest and withdrawals from customers, loans to borrowers, and the banks cost of doing business.
Interest vs. Principle: Interest is the price a borrower pays to borrow the money while principle is the amount of money one borrows.