Chap_11_-_Monetary_System[1]

Chap_11_-_Monetary_System[1] - The Monetary System At some...

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K. Kramer © 2009 The Monetary System At some point today you will probably take a piece of paper and hand it to someone. In exchange they will give something that you want. They will do this even though the piece of paper has very little intrinsic value. The person you gave it to won’t be able to do anything with it except give it away to someone else. Which they will do. And the person they give it to won’t be able to do anything with it but give it to someone else. But instead of everyone being unhappy that this piece of paper with very little value is being passed around, everyone is going to be happy to get it. In fact, most people will try to get more of it. This is basically what happens every day when we pay for things with money. We take a piece of paper that has very little intrinsic value on its own, and get something valuable. What is money? Lets think about Bill Gates for a second. If I were to ask you how much money Bill Gates has, you would probably think about all the different assets that Bill Gates owns, stocks, bonds, real estate etc. and maybe you’d estimate it at $40 billion or so. But in reality, most of that is not money. It’s wealth. In economics, money has a very specific meaning. It is any asset that can easily be used to purchase goods or services. Think about how you pay for your groceries. The checker will accept cash, but they will not accept a stock certificate. Stocks certainly have value, but if you want to trade your stocks for groceries, you will first need to sell your stocks, get money, and then use the money to pay for your groceries. So what be easily used to purchase goods and services? Well, cash that you actually have in your pocket could be used to purchase goods and services. Normally this is called currency in circulation . Currency in circulation is considered money. However, currency inside a bank is not considered money. This is because when it is in the bank, the currency is not really available to be used as a payment. You have to withdraw the money before you can use it. A checkable bank account is a bank account that you can write checks on. Checkable bank accounts are considered money. This is because they can be used to purchase goods and services. Notice that checks themselves are not money. Checks are an instruction to your bank to give someone money. Also debit cards are not money. They are electronic versions of checks. Credit cards are also not money. A credit card is a special id that lets you get instant loans. Finally, some travelers’ checks are considered money.
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K. Kramer © 2009 2 So I’ve listed three things that we consider money: currency in circulation checkable bank accounts traveler’s checks written by non-banks Are these three things the only thing that is considered money? Well, it depends on what your exact definition of money is. Currency in circulation, checkable bank accounts, and traveler’s checks together make up something called M1 . Most of the time economists define money as what is included in M1.
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