Chapter 3 What is Money I Money anything that is used for the payment of goods and the repayment of debts a Currency b Wealth Income c II Functions of Money paper money and coins total collection of pieces of property that serve to store value flow of earnings per unit of time a Medium of Exchange used to pay for goods and services i Promotes economic efficency because it reduces time time spent exchanges goods and services 1 ie opposed to barder and services ii Reducces Transaction Cost time spent trying to exchange goods 1 encourages speciliation and division of labor a people can specialize on what they are efficient at iii Criteria for effective Money 1 easily standaridized a simple to attain value 2 widely accepted 3 divisible a easy to make change 4 easy to carry 5 not deteriorate quickly b Unit of Account used to measure value in the economy i Have all prices quoted in same money so people can shop around and compare value 1 versus barter where you would have thousands of prices listed for same thing a 4 chickens 3 fish 12 pears 1 steak ii reduces transaction cost by limiting the number prices that need to be considered c Store of Value repository of purchasing power over time i Highly Liquid most liquid of all because IT IS the medium of ii People are willing to hold it wven though It does not provide much sxchange other benefits 1 iii Hyperinflation 1 like the high liquidity when inflation rate exceddeds 50 per month results in output of economy falling because people have shoe leather and menu costs III Payment Systems the method of conducting transactions in the economy a Commidity Money money made up of precious metals and other valuable commodity i b Fiat Money Is cumbersome and hard to carry and transport not convertible into precious coins or metals paper currency decreed by governments as legal tender but i Light weight ii Easily stolen iii Need to have faith in government and in anticounterfitting measures an instrument from your bank in which you transfer money from c Checks your account to someone elses Improves efficency Improves safety and security i Easily transported for any amount that can be fit into check ii iii iv Takes time to get from one place to another v Banks put holds on checks in order to make sure money clears 1 some what moe illiquid than cash d Electronin Money E Money money that exhist only in the electroninc form i Efficient and fast ii Convient iii Has privacy and security concerns iv Very expensive t ohave infrastructure set up IV Measuring Money a Feds Monetary Aggregate most liquid assets currency checking accounts and travelers All of M1 Money Market accounts CDs Savings Deposits i M1 checks ii M2 iii Do not generally move together
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