Chapter_13.docx

Chapter_13.docx - Chapter 13 Money, Banks, and the Federal...

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Chapter 13 Money, Banks, and the Federal Reserve System What Is Money and Why Do We Need It? A. Barter and the Invention of Money Money is any asset that people are generally willing to accept in exchange for goods and services or for payment of debts. An asset is anything of value owned by a person or firm. The invention of money started from barter economies , which were economies where people traded goods and services directly for other goods and services. o For a barter trade to take place between two people, each person must want what the other one has, known as double coincidence of wants . A good used as money that also has value independent of its use as money is called commodity money . By making exchange easier, money allows for specialization and higher productivity. B. The Functions of Money Money should fulfill four functions: Money serves as a medium of exchange when sellers are willing to accept it in exchange for goods or services. Money serves as a unit of account when each good has a price in terms of dollars. Money serves as a store of value when value is stored, such as in stock, bonds, real estate, and valuable items. Money serves as a standard of deferred payment in borrowing and lending.
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C. What Can Serve as Money? There are five criteria that make a good suitable to use as a medium of exchange: 1. The good must be acceptable to (that is, usable by) most traders. The good should be of standardized quality so that any two units are identical. The good should be durable so that value is not lost by spoilage. The good should be valuable relative to its weight so that amounts large enough to be useful in trade can be easily transported. The medium of exchange should be divisible because different goods are valued differently. Commodity money (e.g., gold) meets the criteria for a medium of exchange, but its value depends on its purity. Fiat money is a paper currency that is authorized by a central bank or governmental body and that does not have to be exchanged by the central bank for gold or some other commodity money. The central bank of the United States is called the Federal Reserve System . How Is Money Measured in the United States Today ? A. M1: The Narrowest Definition of the Money Supply Economists have developed several different definitions of the money supply. M1 is the narrowest definition of the money supply and includes:
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1. All the paper money (currency) and coins that are in circulation (what is not held by banks or government). The value of all checking account balances at banks. The value of traveler’s checks. B. M2: A Broader Definition of Money M2 is a broader definition of the money supply and includes: 1. Everything that is in M1. Savings account balances.
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Chapter_13.docx - Chapter 13 Money, Banks, and the Federal...

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