econ 5 - Dr. Mohammed Alwosabi ECON 141 - Ch. 5 Notes on...

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Dr. Mohammed Alwosabi ECON 141 - Ch. 5 1 Notes on Chapter 5 MONEY, BANKING, AND MONETARY POLICY WHAT IS MONEY ± Money is anything that is generally accepted as a measure of payment and settling of debt. FUNCTIONS OF MONEY ± Money has three main functions: (1) medium of exchange, (2) unit of account, and (3) store of value. Medium of Exchange : ± A medium of exchange is anything that is generally accepted in exchange for goods and services. ± Example When you buy a meal for lunch you are using money as a medium of exchange ± Without money as medium of exchange, goods and services must be exchanged directly for other goods and services. This is called barter . Barter requires a double coincidence of wants, a situation that rarely occurs. For example if you have CDs and you want to get orange juice, you must find someone who has orange juice and is looking for CDs. Unit of Account ± A unit of account is an agreed measure for stating the prices of goods and services (pricing mechanism). Money provides the term in which prices are quoted and debts are recorded.
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Dr. Mohammed Alwosabi ECON 141 - Ch. 5 2 ± The unit of account in Bahrain is Bahraini Dinar. People quote prices in Dinar. A seller tells you the price of TV is BD150 not 30 shirts (even though they may amount to the same thing). ± Example A BD10000 price tag on a new car is an example of money as a unit of account. ± Example In some countries they quote prices in the local currency but they accept payments in US dollars. The local currency serves as the unit of account and the US dollar serves as the medium of exchange. Store of Value ± A store of value is any good or asset that people can store while it maintains its value or most of its value. Money can be held for a time and later exchanged for goods and services. ± If money were not a store of value, it could not serve as a means of payment. But with inflation, money might loose some of its value. The higher the inflation the larger is the loss. ± Example Money serves as a store of value when people keep cash on hand for emergency or deposit money in their saving accounts. TYPES OF MONEY: Money consists of ± Currency: The paper notes and coins that people use in a country. They are money because government declares them so. (legal tender)
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Dr. Mohammed Alwosabi ECON 141 - Ch. 5 3 ± Deposits at banks and other depository institutions are also money. Deposits are money because they can be converted into currency and because they are used to settle debts. ± Currently, deposits are the largest proportion of money. ± Example Are Checks money? The answer is no. The check is only a way to instruct your bank to transfer money from your account to another person’s account. However, deposit accounts are money ± Example Is credit card considered money? No. It is not. It does not make a final payment and the debt it created must eventually be settled by using money. Credit card is just an ID card that lets you take out a loan at the moment you buy something. MEASURES OF MONEY:
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This note was uploaded on 04/06/2010 for the course BUSINESS econ, mis, taught by Professor Mohammed during the Spring '10 term at École Normale Supérieure.

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econ 5 - Dr. Mohammed Alwosabi ECON 141 - Ch. 5 Notes on...

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