Chapter 34 _ Money, Banking, and Financial Institutions _ ECON 2020.pdf - \u201cIn this chapter and the two chapters that follow we want to unmask the

Chapter 34 _ Money, Banking, and Financial Institutions _ ECON 2020.pdf

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“In this chapter and the two chapters that follow, we want to unmask the critical role of money and the monetary system in the economy. When the monetary system is working properly, it provides the lifeblood of the circular flows of income and expenditure. A well-operating monetary system helps the economy achieve both full employment and the efficient use of resources. A malfunctioning monetary system distorts the allocation of resources and creates severe fluctuations in the economy’s levels of output, employment, and prices.” 34.1 [The Functions of Money]: Identify and explain the functions of money. Just what is money? There is an old saying that “money is what money does.” In a general sense, anything that performs the functions of money is money. Here are those functions: Medium of exchange. First and foremost, money is a medium of exchange that is usable for buying and selling goods and services. A bakery worker does not want to be paid 200 bagels per week. Nor does the bakery owner want to receive, say, halibut in exchange for bagels. Money, however, is readily acceptable as payment. As we saw in Chapter 2, money is a social invention with which resource suppliers and producers can be paid and that can be used to buy any of the full range of items available in the marketplace. As a medium of exchange, money allows society to escape the complications of barter. And because it provides a convenient way of exchanging goods, money enables society to gain the advantages of geographic and human specialization. Unit of account. Money is also a unit of account. Society uses monetary units—dollars, in the United States—as a yardstick for measuring the relative worth of a wide variety of goods, services, and resources. With money as an acceptable unit of account, the price of each item need be stated only in terms of the monetary unit.. It also permits us to define debt obligations, determine taxes owed, and calculate the nation’s GDP. Store of value. Money also serves as a store of value that enables people to transfer purchasing power from the present to the future. People normally do not spend all their incomes on the day they receive them. To buy things later, they store some of their wealth as money. The money you place in a safe or a checking account will still be available to you a few weeks or months from now. When inflation is nonexistent or mild, holding money is a relatively risk-free way to store your wealth for later use. People can, of course, choose to hold some or all of their wealth in a wide variety of assets besides money. These include real estate, stocks, bonds, precious metals such as gold, and even collectible items like fine art or comic books. But a key advantage that money has over all other assets is that it has the most liquidity, or spend ability.
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