CH 16 Money & Banking - What is money Bartering becomes...

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What is money? Bartering becomes complex when people don’t necessarily want what the other person has to offer - and the person who has what they want isn’t interested in their good Needs and wants don’t always align but still need to trade As adding more people - things get more complicated quickly Need something to facilitate trade, so we use money & soon have a circular flow model Primary function of money: to serve as a medium of exchange WWII POW example During WWII prisoners of war were issued rations from Red Cross Bc tastes differed, POWs traded w/each other Had no money so used cigarettes as medium of exchange POWs posted prices in terms of cigarettes In essence, cigarettes were their money American Prisons Americans in jail used cigarettes as medium of exchange until they were banned in 2004 Today, preferred medium of exchange are cans of mackerel Importance of Price Stability People need confidence that money can be exchanged for something else & seller needs to have a good idea of what the cash can be traded for If country gas runaway inflation, value of medium of exchange is less than certain In countries w/bad inflation problems, US currency is preferred as medium exchange bc our dollar is worth more and far more stable than their own currency Second function of money: serve as a unit of account With barter, wasn’t always easy to compare prices Easier w/ a single unit of account Third function of money: can be used as a store of value Can spend money now or in the future Cannot have a medium that will decay over time (ex. bananas) Currency currently on me: $27 Money in checking acct:$950 Savings acct: $2600 Total: $3577 Percentage of money I have in currency: 0.75% Only a small amount of your money is in the form of currency Money in US economy Is a check money? Yes bc it’s a medium of exchange Checks and debit cards are referred to as demand deposits Few ppl use travelers checks, but since they function in same manner as checks, they are part of US money stock Don’t need them anymore bc of credit/debit cards and ATM machines Is a credit card money? No
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When you pay with a credit card, the credit card company pays for you and then you get billed by them later - company is essentially loaning money Govt measures amount of money in US economy M1 represents types of money that are most liquid (easily converted into something that can be spent) Currency part of M1 bc you can spend it on the spot Travelers checks & demand deposits part of M1 too Currency circulating rn is $1.376 trillion and current population is roughly 324 million so the avg american owns $4247 - how is this possible? Where is it all?
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