EC140 Lecture Notes - Lecture 14: Fiat Money, Commercial Bank, Precious Metal
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Money is a medium of exchange if there were no money, goods would have to be exchanged in a system of barter barter is very inefficient due to the double coincidence of wants. Money is also used as a store of value: without high inflation, money retains its value well finally, money is used as a unit of account, used to keep our financial accounts. Money that is neither backed by nor convertible into anything else decreed by the government to be legal tender today, almost all currency is fiat money. Most banking systems have a central bank and many commercial banks a central bank acts as a bank to the banking system: usually a government-owned institution and the sole money-issuing authority. Money creation by the banking system some simplifying assumptions suppose: banks invest only in loans, there are only demand deposits, a fixed target reserve ratio, no cash drain from the banking system.