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MoneyandBankingCh.12.pdf - Money and Banking Money anything...

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Money and Banking Money: anything universally accepted in an economy as payment as sellers/creditors -Is liquid: any asset that can be used for payment/disposed of with minimal transaction costs Functions: 1. Medium of exchange (without it: barter) 2. Unit of accounting: way of placing a price on goods 3. Store of value: doesn’t need to be used immediately 4. Standard of deferred payment: settle debts (both medium of exchange and unit of account) What backs money? Commodity money--grain, olive oil, etc. Representative money--backed by species gold/silver certificates Fiduciary (Fiat) money--money backed by Govt its value based on public’s faith -Not convertible to species -Coins, Fed. Reserve notes -Accepted in all transactions accounts -Anything you can write a check on (Banks, credit unions, S & L, etc.) -Purchasing power of money varies with the price level Gresham’s Law: “Bad money drives out the good” -Ex: dimes--pre-1965 had silver in it worth more than $0.10; post 1965--less Result: pre 65 dimes hoarded/melted Defining the Money Supply: Money supply→ the amount of money in circulation 1. Transaction Approach (M1→ Most liquid form of money) a.
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