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Chap13 1 (got 94% in the course)

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Louisiana State University
ECON 2010

Chapter13MoneyBanksandtheFederalReserveSystemWhatIsMoneyandWhyDoWeNeedItABarterandtheInventionofMoneyMoney is any asset that people are generally willing to accept in exchange for goods and services or for payment of debts An asset is anything of value owned by a person or firmThe invention of money started from barter economies which were economies where people traded goods and services directly for other goods and services oFor a barter trade to take place between two people each person must want what the other one has known as double coincidence of wantsA good used as money that also has value independent of its use as money is called commodity moneyBy making exchange easier money allows for specialization and higher productivityBTheFunctionsofMoneyMoney should fulfill four functionsMoney serves as a medium of exchange when sellers are willing to accept it in exchange for goods or servicesMoney serves as a unit of account when each good has a price in terms of dollarsMoney serves as a store of value when value is stored such as in stock bonds real estate and valuable itemsMoney serves as a standard of deferred payment in borrowing and lendingCWhatCanServeasMoneyThere are five criteria that make a good suitable to use as a medium of exchange1The good must be acceptable to that is usable by most tradersThe good should be of standardized quality so that any two units are identicalThe good should be durable so that value is not lost by spoilageThe good should be valuable relative to its weight so that amounts large enough to be useful in trade can be easily transportedThe medium of exchange should be divisible because different goods are valued differentlyCommodity money eg gold meets the criteria for a medium of exchange but its value depends on its purityFiat money is a paper currency that is authorized by a central bank or governmental body and that does not have to be exchanged by the central bank for gold or some other commodity money The central bank of the United States is called the Federal Reserve SystemHowIsMoneyMeasuredintheUnitedStatesTodayAM1TheNarrowestDefinitionoftheMoneySupplyEconomists have developed several different definitions of the money supplyM1 is the narrowest definition of the money supply and includes
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