Chapter 16 The Monetary System

Chapter 16 The Monetary System - Chapter 16 The Monetary...

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Chapter 16 The Monetary System Double coincidence of wants- the unlikely occurrence that two people each have a good or ser- vice that the other wants. The Meaning of Money Money is the assets in an economy that people regularly use to buy goods and services from oth- er people. The Functions of Money 1.A Medium of Exchange =an item that buyers give to sellers when they want to purchase goods and services. 2. Unit of Account =the yardstick people use to post prices and record debts. 3. A Store of Value = an item that people can use to transfer purchasing power from the present to the future. Money is not the only store of value in the economy, a person can also transfer pur- chasing power from the present to the future by holding other assets. Wealth is used to refer to the total stores of value, including both money and nonmonetary assets. Liquidity= the ease with which an asset can be converted into the economy’s medium of ex- change. Money is the medium of exchange and therefore the most liquid asset available. Stocks and bonds are pretty liquid but houses and paintings aren’t. Though money is most liquid, it is not good as a store of value because prices change very quickly and so does the value of the money. The Kinds of Money Commodity money-money that takes the form of commodity with intrinsic value(means that the item would have value even if it were not used as money.) Gold When an economy uses gold as money(or uses paper money that is convertible to gold), it is said to be operating under a gold standard. Cigarettes In prison of war camps during WWII, prisoners trade with cigarettes as a store of value,unit of account, and medium exchange. As Soviet Union was breaking up in the late 1980’s, cigarettes started replacing the ruble as the preferred currency in Moscow. Fiat money= money without intrinsic value that is used as money because of government de- cree. The acceptance of fiat money depends as much on expectations and social convention as on gov- ernment decree. Money in the U.S Economy Money stock= The quantity of money circulating in the economy.
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Quantity of money includes: Currency = the paper bills and coins in the hands of the public. Demand deposits = balances in bank accounts that depositors can access on demand by writing a check. plus deposits in other financial institutions. M1 and M2 are the two most commonly used measures of the money stock in the U.S economy. M2 includes more assets in its measure. Credit cards are excluded from all measures of the quantity of money because it is not a method of payment but a method of deferring payment. Case Study Where is All the Currency? The currency outstanding was measured to be larger than expected, most people were surprised because they carry far less money in their wallets. There are two possible explanations:
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Chapter 16 The Monetary System - Chapter 16 The Monetary...

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