Money - 3. E-cash Alternatives to a national currency...

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What is Money? A. Hales ECON 3381 Fall 2010
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What is Money? Money is anything that serves the following three functions. 1. Medium of exchange Money can be used to purchase goods and services and to pay off debt 2. Unit of Account Money can be used to measure value in the economy. 3. Store of Value Money serves as a repository of purchasing power over time.
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Other characteristics of money Easily standardized Widely accepted Divisible Portable Durable
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Types of Money Commodity money: valuable good that serves as money Problems with commodity money Perishable Bulky May not be easily divisible Ties up valuable resources Value depends on supply and demand Gresham’s Law: “Bad money drives out good money.” In other words, people tend to trade away inferior money and hoard the rest.
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The Evolution of the Payments System Payments system: method of conducting transactions in the economy. 1. Commodity money 2. Fiat money 3. Checks 4. Electronic funds 1. ATM cards 2. Stored value cards
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Unformatted text preview: 3. E-cash Alternatives to a national currency Dollarization: use of foreign currency (often U.S. $) as money. Ex. Ecuador (2000) and El Salvador (2001) Currency Board: institution that issues money backed by a foreign currency. Ex. Bulgaria () and Hong Kong (U.S. $) Currency Union: Group of countries with common currency. Ex. European Union () Liquidity Refers to the ease of trading an asset for money. An asset is said to be liquid if it is traded for money easily and inexpensively. Degrees of liquidity More liquid Less liquid Currency and Checking Deposits Savings Deposits Securities Real Estate Measuring Money Use the Federal Reserves monetary aggregates 1. M1: currency held by nonbank public + demand deposits + travelers checks-M1 is the most liquid monetary aggregate 2. M2: M1 + savings accounts+ small time deposits (<$100,000) + retail money market mutual funds...
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Money - 3. E-cash Alternatives to a national currency...

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