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Cobbe ECO2013 Fall03 Chapter 11 Page 1 of 12 < When you have completed your study of this chapter, you will be able to C H A P T E R C H E C K L I S T Define money and describe its functions. 1 Describe the monetary system and explain the functions of banks and other monetary institutions. Describe the functions of the Federal Reserve System. 2 3 11.1 WHAT IS MONEY? < Definition of Money Money Any commodity or token that is generally accepted as a means of payment. Any Commodity or Token Something that can be recognized To be useful, money must also be able to be divided up into small pieces – it is hard to buy a cup of coffee if you use cows as money. 11.1 WHAT IS MONEY? Generally Accepted It can be used to buy anything and everything, and most sellers will accept it. Means of Payment A means of payment is a method of settling a debt Modern, ‘general purpose’ money performs three vital functions: Medium of exchange Unit of account Store of value 11.1 WHAT IS MONEY? < Medium of Exchange Medium of exchange Something that is generally accepted in return for goods and services. Without money, you would have to exchange goods and services directly for other goods and services—an exchange called barter . 11.1 WHAT IS MONEY? < Unit of Account A unit of account is an agreed-upon measure for stating the prices of goods and services. Table 11.1 shows how a unit of account simplifies price comparisons.
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Cobbe ECO2013 Fall03 Chapter 11 Page 2 of 12 11.1 WHAT IS MONEY? < Store of Value A store of value is any commodity or token that can be held and exchanged later for goods and services . This allows purchasing power to be moved between time periods without the individual having to store real goods. 11.1 WHAT IS MONEY? < Money Today Money in the world today is called fiat money. Fiat is not just an Italian car, it is the Latin word for “let it be.” Fiat money Things that are money because the law says they are money. The things that we use as money today are: Currency Deposits at banks and other financial institutions 11.1 WHAT IS MONEY? Currency The notes (dollar bills) and coins that we use in the United States today are known as currency . Notes are money because the government declares them to be with the words printed on every dollar bill: “This note is legal tender for all debts, public and private.” Coins are also money, they can be exchanged for notes. 11.1 WHAT IS MONEY? Demand Deposits “Demand deposits” at banks, credit unions, savings banks, and savings and loan associations are also money. These deposits are money because they can be converted into currency on demand and those we can write checks on are used directly to make payments by writing checks. 11.1 WHAT IS MONEY?
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This note was uploaded on 05/22/2011 for the course ECO 2013 taught by Professor Denslow during the Spring '05 term at University of Florida.

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