• A financial asset
  A claim against the income or wealth of a business firm, household, or unit of government
  Represented usually by a certificate receipt, computer record file, or other legal document
  Usually related to the lending of money
  Examples include stocks, bonds, deposits, and others
• Financial assets are sought after because they promise future returns to their owners and serve as a store of value (purchasing power).
  -Financial asset value based on faith that issuer honors contractual promise to pay
  

Financial assets characteristics

• Do not depreciate like physical goods
• Physical condition or form usually not relevant in determining market value
• Have little or no value as a commodity
• Cost of transportation and storage is low
• Financial assets are fungible – can easily be changed in form and substituted for other assets
  

• Financial asset accepted in payment for purchases of goods and services
• Examples are currency and checking
  

• Priority claim over the holders of equities to the assets and income of an economic unit
• Can be negotiable or nonnegotiable
• Examples include bonds, notes, accounts payable, and savings deposits
  

• Market value tied to or influenced by the value or return on a financial asset
• Examples include futures contracts, options, and swaps
  

• The act of borrowing or of issuing new stock simultaneously gives rise to the creation of an equal volume of financial assets.
• All financial assets are recorded as a liability or claim on some other economic unit’s balance sheet.
  Volume of financial assets for lenders
  = Volume of liabilities issued by borrowers
  

• For the balance sheet of any economic unit
  Total assets = Total liabilities + Net Worth
  Where, Assets = Real assets + Financial assets
• For the whole economy and financial system,
  Total financial assets = Total liabilities
• So, for the economy as a whole,
  Total real assets = Total net worth
  

• Society can increase its wealth
  Saving and increasing the quantity of its real assets
  Real assets enable the economy to produce more goods and services
• The financial system provides the essential channel
  Necessary for the creation and exchange of financial assets
  Exchange is between savers and borrowers so that real assets can be acquired
  

Economists John Gurley and Edward Shaw pointed out that each business firm, household, or unit of government active in the financial system must conform to:

R - E = FA - D

Where
R =     Current income receipts
E =     Expenditures out of current income
FA = Change in holdings of financial assets
D = Change in debt and equity outstanding

So, for any given time period, each economic unit must fall into one of three groups:

Deficit-budget unit (DBU):
E > R, so D > FA (net borrower of funds)

Surplus-budget unit (SBU):
R > E, so FA > D (net lender of funds)

Balanced-budget unit (BBU):
R = E, so D = FA (neither net lender nor borrower)

The global financial system permits businesses, households, and governments to adjust their financial position from that of net borrower (DBU) to net lender (SBU) and back again, smoothly and efficiently.

• All financial assets are valued in terms of money, and flows of funds between lenders and borrowers occur through the medium of money.
• Money itself is a financial asset, because all forms of money in use today are claims against some public or private institution.
  

M1 (Narrow Money)

• Physical Currency (notes/bills and coins) plus demand deposits, which are checking accounts.
• This is used as a measurement for economists trying to quantify the amount of money in circulation.
• The M1 is a very liquid measure of the money supply, as it contains cash and assets that can quickly be converted to currency.

M2 (Broad Money)

• M1 + small time deposits (less than $100,000), savings deposits, and non-institutional money-market funds.
• Economists use M2 when looking to quantify the amount of money in circulation and trying to explain different economic monetary conditions.
• M2 is a key economic indicator used to forecast inflation.

M3

• M2 + all large time deposits, institutional money-market funds, short-term repurchase agreements, along with other larger liquid assets.
• This measure of money is used by economists to estimate the entire supply of money within an economy.

Fiat money is money whose value is not derived from any intrinsic value or guarantee that it can be converted into a valuable commodity (such as gold). Instead, it has value only by government order (fiat). Usually, the government declares the fiat currency (typically notes and coins from a central bank), to be legal tender, making it unlawful to not accept the fiat currency as a means of repayment for all debts, public and private.

In the past, money was generally considered to have the following four main functions, which are summed up in a rhyme found in older economics textbooks: “Money is a matter of functions four, a medium, a (unit of ) measure, a standard, a store.”

• Money serves as a unit of account.
• Money serves as a store of value
  Reserve of future purchasing power
  Value of money can fluctuate with inflation
• Money serves as a medium of exchange
  Buyers and sellers no longer need to have an exact coincidence of wants