Chapter 10 Notes - Vandan Desai ECON 102Principles of...

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Vandan Desai ECON 102—Principles of Macroeconomics 1 Chapter 10 —Money and Inflation (Lecture &otes) I. What is Money? A. Money —that part of a person’s wealth that can be readily used for transactions; money also serves as a store of value and a unit of account i. More typical usage —used to describe someone’s wealth or income ii. To an economist, money doesn’t include what person earns in a year or the total assets that one has; only money that can be easily used for transactions B. Three Functions of Money i. Medium of Exchange —something that is accepted as a means of payment 1. In ancient times, people received coins for their agricultural products and then used these coins to buy clothing 2. Barter system —goods are exchanged only for other goods medium of exchange Disadvantage —requires a rare coincidence of wants —person who wants to consume what you want to sell has exactly what you want to consume ii. Store of Value —something that will allow purchasing power to be carried from one period to the next 1. People could sell their products in September for gold coins and then use the coins to buy staples in January 2. Rice and corn can also be stored from one season to the next; therefore, they can also serve as a store of value iii. Unit of Account —a standard unit in which prices can be quoted and values of goods can be compared 1. Prices of goods are usually stated in units of money 2. Originally, units of money were determined by the weight of the metal C. Commodity Money i. Many items have been used for money throughout history—salt, cattle, furs, tobacco, shells, arrowheads, cigarettes, stones weighing several tons, etc. ii. Most common form of money— metallic coins , usually gold, silver, or bronze— divided easily into smaller units , very durable , and easily carried around iii. All these examples of money are commodities and are therefore called commodity money iv. Increases in the supply of gold or any other commodity used as money would cause inflation 1. Huge gold discoveries → price of gold fell → increase in inflation 2. Thus, inflation was determined largely by the supply of precious metals D. From Coins to Paper Money to Deposits i. In late 18 th and early 19 th centuries, paper money began to be used widely and supplemented or replaced coins as a form of money ii. Originally, amt. of currency linked by law/convention to supply of commodities iii. U.S. and other countries are no longer on the gold standard —where government fixed price of gold in terms of paper money iv. Governments now supply virtually all the currency —money in its physical form—coin and paper money v. Checking deposit —an account at a financial institution on which checks can be written; also called checkable deposit
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Chapter 10 Notes - Vandan Desai ECON 102Principles of...

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