Chapter 03 - 3. What is Money 3.1 Meaning of Money 3.2...

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3. What is Money 3.1 Meaning of Money 3.2 Functions of Money 3.3 Evolution of Payments System 3.4 Measuring Money 3.5 How Reliable are the Money Data
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3.1 2 The word money is frequently used synonymously with wealth (the total collection of pieces of property that serve to store value such as money, bonds, common stock, art, real estate) and income (flow of earnings per unit of time whereas money is the amount of stock at a given point in time) Money anything that is generally accepted in payment for goods and services or in the repayment of debts in which currency (consisting of dollar bills and coins) clearly fits the definition and is one type of money
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3.1 3 An even broader definition of money is often needed because other items such as savings deposits can in effect function as money if they can be quickly and easily converted into currency or chequing account deposits
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3.2 4 Primary functions of money (i) medium of exchange (ii) unit of account (iii) store of value Medium of exchange – money is the form of currency or cheques is used to pay for goods and services in almost all market transactions in an economy The function of medium of exchange of money distinguishes it from other assets such as stocks, bonds, and houses
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3.2 5 Money as a medium of exchange promotes economic efficiency by eliminating much of the time spent in exchanging goods and services directly for other goods and services Time spent trying to exchange goods and services is considered as a transaction cost , and transaction costs are higher in a barter economy when people have to satisfy a ‘ double coincidence of wants Money also promotes efficiency by allowing people to specialize in what they do best with time saved from seeking ‘double coincidence of wants’
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3.2 6 Money is essential in an economy because it is a lubricant that allows the economy to run more smoothly by lowering transaction costs , thereby encouraging specialization and the division of labour
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3.2 7 Criteria for a commodity to function effectively as money (i) must be easily standardized making it simple to ascertain its value (ii) must be widely accepted (iii) must be divisible so that it is easy to ‘ make change (iv) must be easy to carry (v) must not deteriorate quickly
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3.2 8 Unit of account – a way to measure value in the economy Without money functioning as unit of account, it requires N(N-1)/2 relative prices in an economy with N goods and services, which will become unmanageable as N grows larger and the solution to that is to introduce money into the economy and have all prices quoted in terms of units of that money
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3.2 9 Using money as a unit of account reduces transaction costs in an economy by reducing the number of prices that need to be considered and the
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This note was uploaded on 10/05/2010 for the course ECO 349 taught by Professor H during the Fall '09 term at University of Toronto.

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Chapter 03 - 3. What is Money 3.1 Meaning of Money 3.2...

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