monetary_system

monetary_system - The Monetary System, Prices, and...

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ECONOMICS: Principles and Applications 3e © 2005 Thomson Business and Professional Publishing Slides by: The Monetary System, Prices, and Inflation
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2 The Monetary System Establishes two different types of standardization in the economy Unit of value—a common unit for measuring how much something is worth Refers to the way we think about and record transactions Means of payment—things we can use as payment when we buy goods and services Refers to how payment is actually made In United States, the dollar is centerpiece of our monetary system
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3 History of the Dollar How did the dollar come to play such an important role in the economy? Prior to 1790, each colony had its own currency Called the “pound” in every colony, but it had a different purchasing power in each of them In 1790 Congress created a new unit of value called the dollar Primary means of payment in United States until Civil War was paper currency issued by private banks However, during Civil War government issued first federal paper currency—greenback Functioned as both unit of value and major means of payment until 1879 In 1913, a new institution was created to be the national monetary authority in United States Federal Reserve System
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4 Why Paper Currency is Accepted as A Means of Payment Paper currency is a relatively recent development in the history of the means of payment Earliest means of payment were precious metals and other valuable commodities such as furs or jewels – Called commodity money because they had important uses other than as a means of payment Commodity money eventually gave way to paper currency Today paper currency is no longer backed by gold or any other physical commodity This type of currency is called fiat money Fiat, in Latin, means “Let there be,” and fiat money serves as a means of payment by government declaration While government can declare that paper currency is to be accepted as a means of payment, it cannot declare the terms Value of the dollar—its purchasing power—does change from year to year Reflected in changing prices of things we buy
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5 Measuring the Price Level and Inflation Microeconomic causes—changes in individual markets—can explain only a tiny fraction of price change For the most part, price rises came about because of a continually rising price level Average level of dollar prices in the economy
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6 Index Numbers Most measures of the price level are reported in the form of an index Series of numbers, each one representing a different period In general, an index number for any measure is calculated as 100 period base in measure of Value period current in measure of Value x Compress and simplify information so that we can see how things are changing at a glance
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7 The Consumer Price Index Most widely used measure of the price level in United States Designed to track price paid by typical consumer
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This note was uploaded on 02/18/2012 for the course BUSE 237 taught by Professor Sf during the Spring '12 term at Simon Fraser.

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monetary_system - The Monetary System, Prices, and...

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