This preview shows pages 1–3. Sign up to view the full content.
This preview has intentionally blurred sections. Sign up to view the full version.View Full Document
Unformatted text preview: Functions of Money Medium of Exchange Makes it possible for buyers and sellers to specialize and trade with each other without a barter system Store of Value Allows people to preserve their wealth for future consumption Standard of Value Facilitates the universal expression of the value or prices of goods and services that are sold or purchased Mean of Deferred Payment Allows people to buy now and pay later History of Money There are three distinctive stages in the history of money 1. Commodity Money 2. Paper Money 3. Credit Money Barter Economy—Commodity Money Individuals in possession of an excess amount of a commodity (as compared to what they need to consume) bring the commodity to the market and exchange it for another commodity 1 pound of potatoes = 3 pounds of tomatoes Monetary Economy—Paper Money This kind of money appeared for the first time in Britain (in the seventeenth century) in the form of Gold Certificates—receipts for gold coins deposited with goldsmiths for safe keeping Eventually, Gold Certificates became the medium of exchange These Certificates were used for the purchase of commodities from other individuals Monetary Economy—Paper Money 1. Take notice that up to this point goldsmiths functioned as safety deposit shops 2. Goldsmiths were obliged to convert Gold Certificates back to gold any time the bearer of such a Certificate requested This move marked the beginning of credit money The same move also marked the transition of Goldsmiths from safety deposit shops to banks, gaining income not from safety service fees but rather from the interest on the loan commitments to third parties The “Price” of Money: The Interest Rate As the conditions of borrowing may vary, we have several kinds of interest rates Commercial interest rates, mortgage rates, consumer loan rates, etc. Moreover, depending on the length of the borrowing period Short Term Rates for borrowing for a period of less than a year u i.e., Federal Funds Rate, Treasury Bill Rates and Commercial Paper Rates Long Term Rates for a period of more than a year u i.e., Tax-Exempt Bonds Rates, Utility Bonds Rates, Treasury Bonds Rates The “Price” of Money: The Interest Rate Another important distinction is between interest rates Nominal interest rates is the dollars one must pay in order to borrow one hundred dollars for a said period of time Real interest rates are nominal interest rates adjusted for inflation Real Interest Rate = Nominal Interest Rate - Inflation i.e., with a 4 percent inflation, a 10 percent nominal rate is equivalent to a 6 percent real interest rate Notice that unlike nominal rates that are normally positive, real interest rates may, at times, be negative i.e., with an inflation rate running at 12 percent, a 10 percent nominal rate implies a negative 2 percent interest rate The Money Market The Money Market Is the process that facilitates the transaction of money...
View Full Document
This note was uploaded on 04/06/2011 for the course MISC 101 taught by Professor Misc during the Spring '11 term at Long Island U..
- Spring '11