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Published byVerity Reynolds Modified over 7 years ago
FrontPage: Consider what money is used for. Could anything else be used in its place? The Last Word: No homework; quiz next week; business presentation Jan 6th
Chapter 10, Section 1
Money is anything that people will accept in exchange for goods and services. Money should perform 3 important functions. Function 1: Medium of Exchange Money must serve as a medium of exchange, the means through which goods and services can be exchanged. Without money, economic transactions must take place through barter – exchanging goods and services for other goods and services have to give them. Barter is inefficient because it requires a double coincidence of wants – you must find someone who has what you want and they must want what you have to give them.
Function 2: Standard of Value Money allows people to measure the relative costs of goods and services. In the U.S., the basic monetary unit is the dollar which is used to state the worth of goods and services in our economy.
Function 3: Store of Value Money allows people to store the value of their economic activities. People generally do not have to spend money immediately or only in one place.
To perform the 3 economic functions of money, an item must possess certain physical and economic properties. - Physical properties are characteristics of the item itself. - Economic properties are linked to the role that money plays in the market.
Durability – money should last throughout many transactions, not spoil or fall apart. Portability – money should be small, light, and easy to carry. Divisibility – money should be divisible so that change can be made. Uniformity – money should be uniform, having features and markings that make it commonly recognizable.
Stability of value – money’s purchasing power, or value, should remain relatively stable. Scarcity – money must be scarce to have any value. Acceptability – people must be willing to accept it in payment for goods and services.
Commodity money derives its value from the type of material from which it is composed. Ex. gold, cattle, rice, etc. Representative money has no intrinsic value, but can be exchanged for something that does. US dollars once were able to be exchanged for an equivalent amount of gold or silver. Fiat money is declared by the govt. and accepted by citizens to have worth (ex. US $ today).
Currency is paper money and coins. Checking accounts are called demand deposits because funds in checking accounts can be converted into currency “on demand.” “Money can't buy love, but it improves your bargaining position.”
Near money is savings accounts and time deposits that can be converted into cash relatively easily. It is measured in the same terms as money (ex. $), but is NOT actually money itself. “A wise person should have money in their head, but not in their heart.” –Jonathan Swift
M1 is the narrowest definition of the money supply and includes currency, demand deposits, and other checkable deposits. (2013 – 2.58 Trillion) M2 is a broader measure that includes all of M1 plus savings accounts, certificates of deposits, and money market mutual funds. (2013 – 10.98 Trillion)
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