Ch. 14 - Money, Banks, and the Federal Reserve System -...

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Chapter 14 – Money, Banks, and the Federal Reserve System What is Money, and Why Do We Need It?
The Functions of Money Medium of Exchange Money serves as a medium of exchange when sellers are willing to accept it in exchange for goods or services An economy is more efficient when people accept a single good as a medium of exchange Unit of Account In a barter system, each good has many prices Once a single good is used as money, each good has a single price rather than many prices Unit of account – a way of measuring value in the economy in terms of money Store of Value Money allows people to easily store value: if you don’t use all your dollars to buy goods and services today, you can hold the rest to use in the future Any asset represents a store of value Financial assets offer an important benefit relative to holding money because they pay a higher rate of interest or may increase in value in the future Other assets also have advantages relative to money because they provide services Liquidity is the ease with which people can convert an asset into the medium of exchange
Since money is the medium of exchange, it is the most liquid asset Standard of Deferred Payment Money is useful because it can serve as a standard of deferred payment in borrowing and lending Money is useful because it can facilitate exchange at a given point in time by providing a medium of exchange and unit of account Money can facilitate exchange over time by providing a store of value and a standard of deferred payment Inflation can make money an unreliable store of value or standard of deferred payment What Can Serve as Money? Five criteria make a good suitable for use as a medium of exchange The good must be acceptable to (usable by) most people It should be of standardized quality so that any two units are identical It should be durable so that value is not lost by spoilage It should be valuable relative to its weight so that amounts large enough to be useful in trade can be easily transported It should be divisible so that it can be used in purchases of both low- priced and high-priced goods Commodity Money

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