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CH 27 - Money & Banking

CH 27 - Money & Banking - CHAPTER 27 MONEY BANKING 27.1...

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CHAPTER 27 MONEY & BANKING 27.1 THE NATURE OF MONEY WHAT IS MONEY? Money is anything that serves as a medium of exchange, a store-of-value, and a unit of account Money as a Medium of Exchange = the double coincidence of wants is unnecessary when a medium of exchange is used o Barter = a system in which goods + services are traded directly for other goods + services o Medium of Exchange = anything that is generally acceptable in return for goods + services sold Money as a Store of Value Money as a Unit of Account ORIGINS OF MONEY: Metallic Money: o Gresham’s Law = the theory that “bad” or debased money, drives out “good” or undebased money out of circulation Predicts that when 2 types of money are used side by side, the one with the greater intrinsic value will be driven out of circulation Paper Money: o Fractionally Backed = it is not necessary to keep one ounce of gold for every claim to one ounce circulating as paper money odds are not everyone will cash their claim at once o Bank Notes = paper money issued by commercial banks o Gold Standard = a currency standard whereby a country’s currency is convertible into gold at a fixed rate of exchange o Fiat Money = paper money or coinage that is neither backed by nor convertible into anything else but is decreed by the government to be accepted as a legal tender If its purchasing power remains stable, it is a satisfactory store of value If both of these things are true, it serves as a satisfactory unit of account Today almost all currency is fiat money o Legal Tender = anything that by laws must be accepted for the purchase of goods + services or the repayment of a debt MODERN MONEY: DEPOSIT MONEY Deposit Money = money held by the public, in the form of deposits with commercial banks Bank deposits are money. Banks create money by issuing more promises to pay (deposits) than they have cash reserves available to pay out Money arose because of the inconvenience of barter and it developed in stages: o Precious Metal Metal Coinage o Metal Coinage Paper Money o Paper Money convert to gold Paper Money fractionally backed by gold
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CH 27 - Money & Banking - CHAPTER 27 MONEY BANKING 27.1...

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