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Unformatted text preview: Chapter 29 The Monetary System 29.1 Introduction z In this chapter we will learn: ¡ The role of money in the economy; what money is; the various forms that money takes; how the banking system helps create money; how the government controls the quantity of money in circulation 29.2 The meaning of money z Money in economics: the set of assets in the economy that people regularly use to buy goods and services from other people. ¡ According to economist’s definition, money includes only few types of wealth that are regularly accepted by sellers in exchange for goods and services. 29.2.1 The functions of money z Three functions of money: 1. A medium of exchange : money is an item that buyers give to sellers when purchase goods and services in a market transaction. 2. A unit of account : money is a standard that people use to post prices and record debts. 3. A store of value : money is an item that people can use to transfer purchasing power from the present to the future. z Wealth : the total of all stores of value, including both money and nonmonetary assets. z Liquidity : the ease with which an asset can be converted into the economy’s medium of exchange. ¡ Money is regarded as the most liquid asset available.; ¡ Most stocks and bonds are relatively liquid assets because they can be sold (converted to money) easily with small cost. z The link between the price level and the value of money: When prices rise, the value of money falls (i.e. low purchasing power of the money) ¡ This link is important for understanding how money affects the economy. 29.2.2 The kinds of money z Commodity money : Money that takes the form of a commodity with intrinsic value. (e.g.: gold, silver) ¡ When an economy uses gold as money (or uses paper money that is convertible into gold on demand), it is said to be operating under a gold standard . z Fiat money : Money without intrinsic value that is used as money because of government decree. (e.g.: paper dollars…it reads “This note is legal tender for all debts, public and private.”) 29.2.3 Money in the U.S. economy z Money stock : the quantity of money circulating in the economy ¡ Two measures of the money stock : M1 and M2 ¢ M1 : z Currency: the paper bills and coins in the hands in the public...
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This note was uploaded on 04/05/2010 for the course ECONOMICS 2009 taught by Professor Lee during the Spring '09 term at Yonsei University.
- Spring '09