Ch 2 - Chapter 2 Money and How We Use It Money is an asset...

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Chapter 2 Money and How We Use It Money is an asset that is generally accepted as payment for goods and services or repayment of debt o Asset- something you own Income is a flow of earnings over time, where wealth is the value of assets minus liabilities Money has 3 characteristics 1. A means of payment 2. A unit of account, and 3. A store of value The first of these characteristics is the most important 1. Means of payment a. People insist on payment in money i. Barter requires a “double coincidence of wants” b. Money is easier and finalizes payments so no further claim on buyers and sellers 2. Unit of Account a. Money is used to quote prices and record debts- it is a standard of value b. Prices provide the information needed to ensure resources are allocated to their best uses c. Using dollars makes relative price comparisons easier A debit card works like a check, only faster o Funds are immediately removed from your account A credit card makes a deferred payment o If not paid on time, there is a late fee o If not paid fully, there is interest on the debt o But if you do pay on time and fully, it is an interest free loan for a period of time o Credit cards allow you to build a credit history 3. Store of Value a. Means of payment has to be durable and capable of transferring purchasing power from one day to the next b. Paper currency does degrade, but is accepted at face value in transactions c. Other forms of wealth are also a store of value: stocks, bonds, houses, etc d. Although other stores of value are sometimes better than money, we hold money because it is liquid e. Liquidity is a measure of the ease with which as asset can be turned into a means of payment i. The more costly it is to convert an asset into money, the less liquid it is. f. Financial institutions use: g. Market liquidity- the ability to sell assets for money h. Funding liquidity- ability to borrow money to buy securities or make loans
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Chapter 2 The Payments System The payment system is a web of arrangements that allow for the exchange of goods and services, as well as assets o It is critical this functions well
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Ch 2 - Chapter 2 Money and How We Use It Money is an asset...

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