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Published on 4 Apr 2011
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Chapter 8: Understanding Money and Banking
-the value of everything you own is your personal wealth
-not all of it, is money
The Characteristics of Money
-over the centuries, items as diverse as stone wheels, salt, wool, and shells have been used as
-money: any object generally accepted by people as payment for goods and services
-any object can serve as money if it is portable, divisible, durable, and stable
Portability- lightweight and easy to handle
Divisibility- modern currency is easily divisible into smaller parts with fixed values for
each unit
Durability- modern currency does not spoil, die, or wear out, it can be replaced with new
coins and paper money
Stability- the value of paper money we use today has fluctuated over the years, it is
considered stable
The Functions of Money
-a barter economy is an economy in which goods are exchanged directly for one another
-a money economy is an economy in which a seller would sell his good, receive money, and
exchange the money for another good
-the barter economy is quite inefficient, but it is still used in various places around the world such
as Russia
-money serves as three functions:
Medium of exchange- we use money as a way of buying and selling things
Store of value- money can be used for future purchases and thereforestores value
Unit of account- money lets us measure the relative goods and services. It acts as a unit
of account because all products can be valued and accounted for in terms of money
Credit Cards: Plastic Money?
-credit has become a major factor in the purchase of consumer goods
-credit cards are referred asplastic money”
-credit cards are money substitute; serve as a temporary medium of exchange but are not a store
of value
-credit cards are convenient, and extremely profitable for issuing companies
-profits derive from two sources: some cards charge annual fees to holders and merchants who
accept credit cards pay fees to card issuers