Chapter 13 - 10/24/2010 Chapter 13 Money, Banks, and the...

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10/24/2010 1 Chapter 13 Money Banks and the Money, Banks, and the Federal Reserve System Consider the purchase of a good with money: Money : Assets that people are generally willing to accept in exchange for goods and services or for payment of debts. Assets : Anything of value owned by a person or a firm. Money vs. Wealth
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10/24/2010 2 In a world without money, how would trade occur? What’s so bad about that? ± Barter requires a double coincidence of wants . Suppose that you want a laptop computer and you have a bicycle to trade. Not only want a laptop computer and you have a bicycle to trade. Not only do you have to find someone with a laptop computer that you want, but that person must ± Consider a money economy on the other hand. You can sell your bicycle to anyone who wants it. They pay you with ___________. You then use this money to pay the laptop owner for her computer You then use this money to pay the laptop owner for her computer. ± Thus, you can specialize in doing one or two activities, earn money, and use this money to buy Four Functions of Money 1) Money serves as a medium of exchange when sellers are willing to accept it in exchange for goods or services. 2) Unit of Account : Consider a barter economy with 4 goods: lemons, shoes, cars, and chairs. What is the price of a car? 3) Store of Value : Money allows value to be stored easily: If you do not use all your accumulated dollars to buy goods and services today, you can hold the rest to use in the future. Do other assets store value also?
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10/24/2010 3 If some assets store value better than money, then why do people hold any money at all? Liquidity is the ease with which an asset can be converted to medium of exchange. When people decide in what forms to hold their wealth, they have to balance the liquidity of each possible asset against the asset’s usefulness as a: 4) Money is useful because it can serve as a standard of deferred paymen in borrowing and lending payment in borrowing and lending. How does inflation affect the functions of money? High inflation limits the ability of money to effectively serve as: The Kinds of Money Definition of commodity money : money that takes the form of a commodity with intrinsic value . Definition of fiat money: money without intrinsic value that is used Definition of fiat money : money without intrinsic value that is used as money because of government decree . Measuring Money in the U.S. Economy
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Chapter 13 - 10/24/2010 Chapter 13 Money, Banks, and the...

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