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Chapter 2_Money and the Payments System

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Pennsylvania State University
ECON 351
Frank Sorokach

Chapter 2: Money and the Payment System  Do we need Money? 1. Money 2. Barter - Transaction Costs 3. Commodity Money  Key Functions of Money 1. Medium of Exchange 2. Unit ofAccount 3. Store of Value 4. Standard of Deferred Payment  What can serve as Money? 1. Acceptable – to [that is, usable by] most people 2. Standardized in terms of Quality – so that any two units are identical 3. Durable – so that it does not quickly become too worn out to be usable 4. Valuable – relative to its weight, so amounts large enough to be useful in trade can easily conveyed.  The Payment System - Fiat Money, Legal Tender, Checks and E-Money such as PayPal which is owned by eBay  Two types of Money Supply or Measuring Monetary Aggregates 1. M1 – Cash  liquid money - Checking account deposits - Traveler’s checks - Currency 2. M2 –All liquid but takes time to get the cash - Includes
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