im2 - Chapter 2 Money and the Payments System Overview...

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Chapter 2 Money and the Payments System Overview Students generally find a discussion of the definition and measurement of money to be very useful. The chapter carefully describes the fundamental role that money plays in facilitating exchange and, thereby, allowing for specialization. Students often find it interesting to consider why an economy needs to use money at all. A careful discussion of the disadvantages of barter and advantages of specialization is worthwhile. The chapter also includes a thorough discussion of the definitions of money, which are then applied in the remainder of the chapter when the measurement of money is discussed. Students are often surprised to learn that there is no one definition of the money supply. An important point to highlight is that the financial innovations of the 1970s, 1980s and 1990s have made it very difficult to come up with a narrow definition of the medium of exchange. The problems that this difficulty poses for policy should be mentioned at this point. The modification of what’s included in M2 and the elimination of M3 in 2006 further illustrates how the measurement of money continues to be refined. Also introduced in this chapter is the idea of the payments system—the mechanism for conducting transactions. The chapter discusses the evolution of the payments system from precious metals to currency and checks to electronic funds transfer services—such as automated teller machines (ATMs) and debit cards. A point worth emphasizing is that the efficiency of payments system—as measured by the cost of settling transactions—is important for the economy. Outline I. Meeting the Needs of Exchange with Money A) Money makes exchange more efficient and allows for specialization . B) The type of exchange known as barter , where goods and services are exchanged directly for other goods and services is inefficient because it incurs high transactions costs . C) Voluntary trade may be sidestepped by using government allocation to distribute goods and services, but this is unlikely to be successful because it ignores market forces. D) Money has four key functions that make it the most efficient means of trade: 1. Money acts as a medium of exchange , which is anything that is generally accepted as payment for goods and services or in the settlement of debts. 2. Money is a unit of account , which is a way of measuring value in the economy in terms of money. 3. Money is a store of value , in that it is an asset or a thing of value that can be owned and is, therefore, a component of wealth . 4. Money offers a standard of deferred value in credit transactions.
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6 Hubbard • Money, the Financial System, and the Economy, Sixth Edition E) The value of money depends on its purchasing power . 1. A decline in the purchasing power of money is known as
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This note was uploaded on 09/11/2011 for the course ECON 304 taught by Professor Sanchez during the Fall '11 term at NMSU.

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im2 - Chapter 2 Money and the Payments System Overview...

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