Econ Notes prt 3

Econ Notes prt 3 - Econ Notes prt 3 _ * Chapter 3 *...

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Econ Notes prt 3 _______________________________________________________________________________________________________________________ _ * Chapter 3 * Functions of Money Medium of exchange : anything that is used to pay for goods and services o Barter economy is inferior to money economy o For people to be satisfied in a barter economy there must be a “double coincidence of wants” o Transaction Costs : the time spent trying to exchange goods or services o Money is a lubricant that allows the economy to run more smoothly by lowering transaction costs, thereby encouraging specialization and the division of labor o For a commodity to function effectively as money it has to meet several criteria: It must be easily standardized, making it simple to ascertain its value It must be widely accepted It must be divisible It must be easy to carry It must not deteriorate quickly Unit of Account : anything used to measure value in an economy o We measure the value of goods and services in terms of money, just as we measure distance in terms of miles o We can see that using money as a unit of account reduces transaction costs in an economy by reducing the number of prices that need to be considered Store of Value : a repository of purchasing power over time o A store of value is used to save purchasing power from the time income is received until the time it is spent o Money fuctions as a store of value but is not unique as a store of value; any asset-whether money, stocks, bonds, land, houses, art, jewelry-can be used to store wealth o Many of these assets have a greater store of value because they may be used to generate interest o Liquidity : the relative ease and speed with which an asset can be converted into a medium of exchange o Money is the most liquid of all assets be cause it is the medium of exchange Evolution of the payment system Payment System : Method of conducting transactions in the economy Money made up of precious metals or another valuable commodity is called Commodity Money The problem with a payment system based exclusively on precious metals is that such a form of money is very heavy and is hard to transport from one place to another Now, currency has evolved into fiat money , paper currency decreed by governments as legal tender (meaning that legally it must be accepted as
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Econ Notes prt 3 - Econ Notes prt 3 _ * Chapter 3 *...

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