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Unformatted text preview: Review Sheet for Exam 3 Ch. 15 • What are the functions of money? (be able to list and define each) p367-368 (a) Money as a Medium of Exchange: As a medium of exchange, money allows individuals to specialize in producing those goods for which they have a comparative advantage and to receive money payments for their labor. This permits more specialization and the inherent economic efficiencies that come with it. Money reduces the transaction costs associated with means-of-payment uncertainty. (b) Money as a Unit of Accounting: As a unit of accounting, money offers a way to easily compare the relative value of goods and services. It serves as a standard of value that allows people to compare the relative worth of various goods and services. (c) Money as a Store of Value: As a store of value, money provides purchasing power. You can set aside money to purchase things later and money retains its nominal value in the meantime. Money provides a way to transfer value 9wealth) into the future. (d) Money as a Standard of Deferred Payment: This function involves the use of money both as a medium of exchange and as a unit of accounting. Debts are typically stated in terms of a unit of accounting and are paid with a monetary medium of exhcnage. • Define liquidity. p369 Liquidity: The degree to which an asset can be acquired or disposed of without much danger of any intervening loss in nominal value and with small transaction costs. Money is the most liquid asset. • What are transactions accounts and checkable deposits? What are the two requirements for a fiduciary monetary system? (acceptability and predictability of value). (a) Transactions Accounts: Any accounts in financial institutions from which you can easily transmit debit-card and check payments without many restrictions. p370 (b) Checkable Deposits: Checkable deposits are any deposits in a thrift institution (such as a bank) on which a check may be written. The only liability a bank has is its checkable deposits. Instructor Notes PDF, p3 (c) The two requirements for a fiduciary monetary system are acceptability and predictability of value. Transactions deposits and currency are accepted because people have confidence that these items can later be exchanged for other goods and services. Though the purchasing power of money may fluctuate (i.e. due to inflation), a potential decline can be anticipated and thus money retains a predictability of value. p370 • What does the Federal Reserve (the fed) do? What are the functions of the fed? p382 & p384-386 (controlling money supply most important function) •...
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