CH13 - 2009-10-261Money, Banks, and theFederal Reserve

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Unformatted text preview: 2009-10-261Money, Banks, and theFederal Reserve System1LearningObjective 13.1Money Assets that people are What Is Money and Why Do We Need It?What Is Money and Why Do We Need It?generally willing to accept in exchange for goods and services or for payment of debts.Asset Anything of value owned by a person or a firm.22009-10-262LearningObjective 13.1The invention of money started from barter economies, in which people tradedBarter and the Invention of MoneyWhat Is Money and Why Do We Need It?What Is Money and Why Do We Need It?barter economies, in which people traded goods and services directly for other goods and services.One problem in barter economies:double coincidence of wantsCommodity moneyA good used as money that also has value independent of its use as money.LearningObjective 13.1Anything used as money—whether a deerskin, a seashell, cigarettes, or a dollarThe Functions of MoneyWhat Is Money and Why Do We Need It?What Is Money and Why Do We Need It?deerskin, a seashell, cigarettes, or a dollar bill—should fulfill the following four functions: • Medium of exchange• Unit of account• Store of value• Store of value• Standard of deferred payment2009-10-263LearningObjective 13.1Medium of ExchangeThe Functions of MoneyMoney serves as a medium of exchange when sellers What Is Money and Why Do We Need It?What Is Money and Why Do We Need It?are willing to accept it in exchange for goods or services.Unit of AccountIn a barter system, each good has many prices.Store of ValueMoney allows value to be stored easily: If you do not use all your accumulated dollars to buy goods and services 5today, you can hold the rest to use in the future.Standard of Deferred PaymentMoney is useful because it can serve as a standard of deferred payment in borrowing and lending.LearningObjective 13.1What Can Serve as Money?Five criteria make a good suitable to use as a medium of exchange:1The good must beacceptableto (that is usable by)What Is Money and Why Do We Need It?What Is Money and Why Do We Need It?1The good must be acceptableto (that is, usable by) most people.2It should be of standardized qualityso that any two units are identical.3It should be durableso that value is not lost by spoilage.64It should be valuablerelative to its weight so that amounts large enough to be useful in trade can be easily transported.5The medium of exchange should be divisiblebecause different goods are valued differently.2009-10-264LearningObjective 13.1What Can Serve as Money?Commodity MoneyWhat Is Money and Why Do We Need It?What Is Money and Why Do We Need It?Commodity money meets the criteria for a medium of exchange.It can be inefficient for an economy to rely on only gold or other precious metals for its money supply7metals for its money supply....
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This note was uploaded on 02/22/2010 for the course FBE ECON1002 taught by Professor Rao during the Spring '10 term at HKU.

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CH13 - 2009-10-261Money, Banks, and theFederal Reserve

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