Chapter 3 Mishkin Summary 09/27/2013 1. To economists, the word money has a different meaning from income wealth . Money is
anything that is generally accepted as payment for goods or services or in the repayment of debts.
2. Money serves three primary functions: as a medium of exchange, as a unit of account, and as a
store of value. Money as a medium of exchange avoids the problem of double coincidence of wants that
arises in a barter economy by lowering transaction costs and encouraging specialization and the
division of labor. Money as a unit of account reduces the number of prices needed in the economy,
which also reduces transaction costs. Money also functions as a store of value, but performs this role
poorly if it is rapidly losing value due to inflation.
3. The payments system has evolved over time. Until several hundred years ago, the payments system
in all but the most primitive societies was based primarily on precious
metals. The introduction of paper currency lowered the cost of transporting money. The next major
advance was the introduc