Chapter 13

Chapter 13 - Chapter 13: Money, Banks, and the Federal...

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Chapter 13: Money, Banks, and the Federal Reserve System What is Money and Why do we need it? Money: assets that people are generally willing to accept in exchange for goods and services or for payment of debts Assets: Anything of value owned by a person or firm Barter and the Invention of Money Barter economy o Goods and services are traded directly for other goods and services o For a trade to take place between two people, each person must want what the other one has Double coincidence of wants Commodity money: A good used as money that also has value independent of its use as money o Gold, precious metal Trading goods and services is much easier when money becomes available By making exchange easier, money allows for specialization and higher productivity The functions of Money Anything used as money—whether a deerskin, a cowrie seashell, or a dollar bill— should fulfill the following four functions: o Medium of exchange o Unit of account o Store of value Money in itself keeps its value o Standard of deferred payment What can serve as money? What makes a good suitable to use as a medium of exchange? There are 5 criteria: o The good must be acceptable to most traders o It should be of standardized quality, so that any two units are identical o It should be durable, so that value in not lost to spoilage o It should be valuable to its weight so that amount large enough to be useful in trade can be easily transported o The medium of exchange should be divisible because different goods are valued differently Commodity money o Gold, copper, silver, etc Fiat money o Money, such as paper currency, that is authorized by a central bank or governmental body and that does not have to be exchanged by the central bank for gold or some other commodity money How do we measure money today? M1: the narrowest definition of the money supply
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Chapter 13 - Chapter 13: Money, Banks, and the Federal...

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