MONEY - SECTION 28: MONEY WHAT IS MONEY? Anything that is...

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SECTION 28: MONEY
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WHAT IS MONEY? Anything that is generally accepted as a MEANS OF PAYMENT Any item can serve as money as long as it is generally accepted as a medium of exchange
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The primary function of money is that it should serve as a MEDIUM OF EXCHANGE or MEANS OF PAYMENT: Any item used as money should be commonly used by buyers and commonly accepted by sellers Use of money eliminates the need for barter which is inefficient.
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Besides serving as a MEDIUM OF EXCHANGE, money has several other functions that make it useful Money serves as a UNIT OF ACCOUNT: Any item that serves as money should serve as an agreed upon measure for stating the prices of goods and services
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To serve as a unit of account , the item used as money should be able to designate the price of all items. Thus, money should be able to be broken into small fractions. I.e.: a piece of candy might cost 1 penny, while a house might cost $500,000 Suppose we used diamonds as money. It would be difficult to state the prices of things in terms of diamonds. A house might cost 100 diamonds, or a piece of candy might cost one one-thousandth of a diamond.
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To be useful, money should serve as a STORE OF VALUE Any item that is used as money should serve as an asset that can be held for a period of time and used for payment later without losing value . Thus, any item used as money should retain its purchasing power over time
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During periods of high inflation, currency loses value rapidly. Thus, it loses its usefulness as a store of value. If the item serving as money is losing value rapidly, people
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This note was uploaded on 04/15/2008 for the course ECON 0110 taught by Professor Kenkel during the Fall '08 term at Pittsburgh.

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MONEY - SECTION 28: MONEY WHAT IS MONEY? Anything that is...

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