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Unformatted text preview: Chapter 29. The Monetary System This chapter studies money, and how it is controlled in the U.S. and other countries. Money serves three basic functions: Unit of Account Store of Value Medium of Exchange Money’s role as a medium of exchange is particularly important. Money makes transactions much more efficient. Specifically, without money, transactions are conducted by barter, in which one good is traded for another good. For example, an apple seller trades her apples to an orange seller for oranges. Any barter transaction is subject to the double coincidence of wants. This arcane term means that each seller in any trade must be providing a good or service that the other trading partner wants. In the example above, the only way that the orange seller and the apple seller will trade with each other is if the orange seller wants apples, and the apple seller wants oranges. If the orange seller is looking for bananas, then there is no trade. Money thus eliminates the double coincidence of wants. This is because with money, a seller of a good doesn’t have to worry about finding a trading partner who sells what she wants. Instead, they just need to find someone who wants what they have. Over history, many products have served as money. Back in the day, precious commodities, including gold and silver were used. Today, virtually all of the world’s money is fiat money. The key feature of fiat money is that it is intrinsically worthless. That is, the intrinsic value of the paper that US currency is printed on is virtually zero. virtually zero....
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- Winter '07