Money and Inflation

Definition of Barter  Barter is a type of trade in which goods or services are directly exchanged for other goods and/or services, without the use of money.

Definition of Money  Money is anything that is generally accepted as payment for goods and services and repayment of debts.

What Makes Money Important? Money serves these functions: 1. It is a medium of exchange.  Money is valuable because it is accepted in buying and selling goods and services. Money makes trading easier than would be the case with barter. 2. It is a store of value.  Money is a way of storing wealth. For example, if you work today, you can get paid in money and wait to spend it in the future. 3. It is a measure of value.  Money can be used to state how much things are worth. The value of goods and services can be expressed in money prices, allowing for easy comparisons.

MV=PQ M: the supply of money in the economy V: the velocity of money, or the number of times a year that the average dollar is spent on final goods and services P: the overall price level in the economy, reflecting the average price at which all output is sold Q: the quantity of all goods and services produced; also known as real output The equation MV = PQ is a simple model of a macro economy during a time period. MV represents the total amount spent by buyers in the economy, and PQ represents the total amount received by sellers, so the two must be equal. If there is a change in one of the variables, there must be a change in one of the other variables to keep MV equal to PQ.

Types of Money  1. Commodity money- money whose value comes from a natural resource or good out of which it is made. Examples of commodities that have been used as mediums of exchange include gold, silver, copper, salt, peppercorns, large stones, decorated belts, shells, alcohol, cigarettes, cannabis, and candy.  2. Representative money- money that consists of token coins, other physical symbols such as certificates that can be reliably exchanged for a fixed quantity of a commodity such as gold, water, oil, food, etc.  3. Currency- coins and paper money

Types of Money (cont.)  4. Fiat money- money used as the circulating medium of exchange that is not backed by or directly convertible into any specific physical commodity, but rather has value because the society that created the system that has assigned it value  5. Legal tender- money that by law cannot be refused as a medium of exchange

Types of Money (cont.)  6. Checkbook money/demand deposits- An account from which deposited funds can be withdrawn at any time without any notice to the bank that is holding it.  7. Savings deposits- accounts maintained by banks that pay interest but cannot be used directly as money. Customers must transfer the money to a demand deposit or into cash to use this money as a medium of exchange.  8. Timed deposit- a money deposit at a banking institution that cannot be withdrawn for a certain period of time.

Question  Is U.S. currency fiat money or representative money ?

Assignment (if time)  Get into groups of 3-4.  Tremper has decided to issue its own money and you have been asked to design the currency and create a table of the value of the currency in relation to certain commonly used school supplies.  The money should:  Be colorful with multiple illustrations that relate to high school life and your school in particular  Meet the major characteristics of effective money discussed during class  Have at least three difference denominations (divisible units)  ANSWER THE FOLLOWING QUESTION ON THE BACK: What type(s) of money is your currency?