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Chapter 13 notes

Chapter 13 notes - Chapter 13 Notes Money Banks and the...

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Chapter 13 Notes Money, Banks, and the Federal Reserve Franchise : a business with the legal right to sell a good or service in a particular area. o Franchises in other countries offer foods/goods not offered in the US plus goods that are offered in the US. o McDonald’s: offers the Big Mac and French Fries in Argentina plus gourmet coffee and other foods not available in the US. 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. Asset : anything of value owned by a person or a firm. Barter and the Invention of Money Barter Economies : economies where the goods and services are traded directly for other goods and services. o For trade to happen, each party must want what the other has. Double Coincidence of Wants Commodity Money : a good used as money that also has value independent of its use as money. Why do we need money? o By making exchange easier, money allows for specialization and higher productivity. Money in a World War II Prisoner-of-War Camp Cigarettes became a normal currency; these were included in Red Cross packages. The Functions of Money Four Functions: o Medium of Exchange o Unit of Account o Store of Value o Standard of Deferred Payment Medium of Exchange Money serves as a medium of exchange when sellers are willing to accept it in exchange for goods and services. An economy is more efficient when a single good is recognized as a medium of exchange. Unit of Account When each good has a single price quoted in terms of the medium of exchange: unit of account: o Measuring value in the economy in terms of money Store of Value Money is not the only store of value. o Bonds, stock, real estate (any asset) o Financial assets offer an important benefit relative to holding money because they generally pay a higher rate of interest. Why hold money?
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o Liquidity: the ease with which a given asset can be converted into the medium of exchange. Standard of Deferred Payment Money can facilitate exchange at a given point in time by providing a medium of exchange and unit of account. It can facilitate change over time by providing a store of value and a standard of deferred payment. o A furniture maker may be willing to sell a chair to a boat builder now in exchange for money in the future. What can serves as money? Five criteria that make a good suitable to use as a medium of exchange: 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 is not lost by spoilage. o It should be valuable relative to its weight so that amounts large enough to be useful in trade can be easily transported.
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