MONEY

Define Money? Coins and Bills? Economists define money in terms of its three uses 1) Medium of Exchange 2) Unit of Account 3) Store of Value

Medium of Exchange Anything that is used to determine value during the exchange of goods and services How would people acquire goods w/o money? Barter – Exchange of one set of goods or services for another Used today? Money makes exchanges much easier

Unit of Account A means for comparing the values of goods and services Comparing cost How much does a movie ticket cost? How much does an ipod cost?

Store of Value Money keeps its value if you decide to hold on to it (store it) One Exception: Inflation (Increase in Prices)

Six Characteristics of Money Coins and Paper Bills used as money: Currency Past societies have used cattle, salt, gold, silver, wheat, etc. Not work very well today Each lacks at least one characteristic

CHARACTERISTICS 1) Durability o Withstand physical wear & tear o If money wears out it cannot serve as a store of value o Coins last for many years (made from copper/nickel) o Paper money – Cloth content helps $1 bills last at least one year (18 months in circulation on average) $100 – 9 years on average o 25% Cotton; 75% Linen o 51% Rule

Characteristics 2) Portability o Able to take money with you o Easily transfer money from one person to another o Coins and paper money are very portable

Characteristics 3) Divisibility o To be useful money must be easily divided into smaller denominations o Only have to use as much of it as necessary o ’s: People actually used pieces of coins

Characteristics 4) Uniformity o Units of money must be the same – in terms of what they will buy o Must be able to count and measure money accurately o $1 – Buys you $1 worth of goods

Characteristics 5) Limited Supply Federal Reserve System controls the supply of money in circulation Set Reserve Requirements for local banks

Characteristics 6) Acceptability Why do people accept money? Confidence in our money

Value Bills and Coins in your pocket are: o Durable o Portable o Easily Divisible o Uniform o In Limited Supply o Accepted throughout the country What makes it Valuable? Depends what “type” of money you have

Money Commodity Money Representative Money Fiat Money

Commodity Money Objects that have value (and can be used as money) Salt – If not used as money….. Cattle – If not used as money…. Lacks characteristics Works only in simple economies

Representative Money Objects that have value because the holder can exchange them for something else of value Early form of money was gold/silver Instead of carrying gold/silver Bank note (certificate) that could be exchange for silver or gold

Fiat Money “Our money is valuable because………. Our government says it is!” “This note is legal tender for all debts, public and private”