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Matthew_McCoy_Week_7_Chapter_31_Assignment - Matthew McCoy...

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Matthew McCoy ECON201 Week 7 Chapter 31 Assignment July 21, 2011 Professor John Volpe 1. What are the three basic functions of money? Describe how rapid inflation can undermine money’s ability to perform each of the three functions. The three basic functions of money are: 1. Medium of exchange 2. Unit of account 3. Store of value People will only accept money in exchange for goods and services and for the work they perform if they can be reasonably certain that money will retain its value until they are ready to spend it. In runaway inflations of the thousands or tens of thousands of percent a year, people revert to barter. Again, drastic inflation greatly reduces money's use as a measure of value, for it is impossible to adjust instantaneously all prices strictly in line with their relative values. Thus, opportunities are afforded to speculators to profit at the expense of the less sophisticated who, eventually, will learn to distrust money's usefulness as a measure of value. 5. What “backs” the money supply in the United States? What determines the value (domestic purchasing power) of money? How does the purchasing power of money relate to the price level? Who in the United States is responsible for maintaining money’s purchasing power? The money supply in the United States essentially is “backed” by the government’s ability to keep the value of money relatively stable. Nothing more (McConnell, Brue, & Flynn, 2011, p. 640)!
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The value of money is determined by three parts: acceptability, legal tender, and relative scarcity. Currency and checkable deposits are money because people accept them as money. Our confidence in the acceptability of paper money is strengthened because government has designated currency as legal tender. The value of money, like the economic value of anything
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Matthew_McCoy_Week_7_Chapter_31_Assignment - Matthew McCoy...

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