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ECON 2010 Prin Macroeconomics Chapter 14 Notes

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ECON 2010

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1Chapter 14 Money Banksthe FedIWhat is MoneyWhy Do We Need ItaMoneyassets that people are generally willing to accept in exchange for goodsservices or for payment of debtsbAssetanything of value owned by a person or firmcBarterthe Invention of MoneyiCommodity moneya good used as money that also has value independent of its use as money meets the criteria for a medium of exchangeiiBarter economieseconomies where goodsservices are traded directly for other goodsservices major shortcomingsiiiDouble coincidence of wants in order for a barter trade to occur each person has to have what the other wantsMay have to trade a few timesdThe Functions of MoneyiAnything used as moneywhether a deerskin a cowrie seashell cigarettes or a dollar billshould fulfill the following four functions1Medium of exchange money serves as a medium of exchange when sellers are willing to accept it in exchange for goods or servicesaAny economy is more efficient when it recognizes a single good as a medium of exchange2Unit of account in a barter system each good has many prices3Store of value money allows value to be stored easily if you do not use all your accumulated dollars to buy goodsservices today you can hold the rest to use in the futureaAny asset represents a store of value4Standard of deferred payment money is useful because it can serve as a standard of deferred payment in borrowinglendingiiBy making exchange easier money allows people to specializebecome more productiveiiiMoney can facilitate exchange over time by providing store of valuestandard of deferred paymentivMoney can facilitate exchange at a given point in time by providing a medium of exchangeunit of accounteWhat can serve as money Five criteria make a good suitable to use as a medium of exchangeiThe good must be acceptable to that is usable by most peopleiiIt should be of standardized quality so that any two units are identicaliiiIt should be durable so that value is not lost by spoilageivIt should be valuable relative to its weight so that amounts large enough to be useful in trade can be easily transportedvThe medium of exchange should be divisible because different goods are valued differentlyfFiat moneymoney such as paper currency that is authorized by a central bank or governmental bodythat does not have to be exchanged by the central bank for gold or some other commodity moneyIt can be inefficient for an economy to rely on only gold or other precious metals for its money supplyiFederal reserve not at the top of US dollariiFed money is legal tenderfed requires that it be accepted in payments of debtsrequires that cashchecks denominated in dollars be used in payment of taxesgFederal Reserve Systemthe central bank of the United StatesIIUS Money TodayaM1the sum of currency in circulation checking account deposits in banksholdings of travelers checksIt includesiCurrency which is all the paper moneycoins that are in circulation where in circulation means not held by banks or the governmentiiThe value of all checking account deposits at banksiiiThe value of travelers checks although this last category is so smallless than 7 billion in May 2008we will ignore it in our discussion of the money supply
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