Macroeconomics 111 - Chapter 13

Macroeconomics 111 - Chapter 13 - Chapter 13: Money and...

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Chapter 13: Money and Banking Money – is anything generally acceptable to sellers in exchange for goods and services A liquid asset is an asset that can easily be exchanged for goods and services Functions of Money 1. Medium of exchange 2. Unit of account 3. Store of value 4. Standard of deferred payment Medium of Exchange -The use of money as a medium of exchange lowers transactions costs -Trade without money, directly exchanging goods for gods, is called barter -Barter required a double coincidence of wants - each party to the exchange has to want what the other has to trade -Finding someone else who wants what you have to trade and who has what you want is time-consuming and costly It must be… - Widely accepted for payment - Portable – easy to transport and transfer to the seller - Divisible – measurable in both small and large units Unit of Account -Money acts as a common unit of measurement -This allows us to compare the values of very dissimilar things -It makes accounting possible -As a result of these things, it lowers information costs Store of Value - Money makes it possible to carry buying power forward into the future -Therefore, for money to be a store of value, it must be durable - Durability – is the ability to retain value over time - Inflation – can reduce the effectiveness of money as a store of value -This can lead to currency substitution – the use of foreign money as a substitute for domestic money when the domestic economy has a high rate of inflation Standard of Deferred Payment - Debit is denominated in money terms -The standard for repayment is money -There is a difference between money and credit : - Money what you use to pay for goods and services -Credit is available savings that are lent to borrows to spend - Credit is debt – something you owe
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M1 Money Supply -Currency is the bills and coins that we use - Deposits are also money because they can be converted into currency and are used to settle debts -M1 is the narrowest and most liquid measure of the money supply -It includes financial assets that are immediately available for spending on goods and
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Macroeconomics 111 - Chapter 13 - Chapter 13: Money and...

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