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Chapter 10

Chapter 10 – The Monetary System.docx

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Bridget O' Shaughnessy

Chapter 10The Monetary SystemBarterthe exchange of one good or service for anotherto obtain the things they need An economy that relies on barter will have trouble allocating its scarce resources efficiently In such an economy trade is said to require the double coincidence of wantsthe unlikely occurrence that two people each have a good or service that the other wantsThe meaning of money Money the set of assets in an economy that people regularly use to buy goods and services from other peopleIf you owned the Microsoft Corporation you would be wealthy but this asset is not considered a form of moneyYou could not buy a meal or a shirt with this wealth without first obtaining some cashAccording to economists money includes only those few types of wealth that are regularly accepted by sellers in exchange for goods and servicesThe functions of money Money has three functions in the economyMedium of exchangeUnit of accountStore of valueMedium of exchange an item that buyers give to sellers when they want to purchase goods or servicesUnit of account the yardstick people use to post prices and record debtsStore of value an item that people can use to transfer purchasing power from the present to the futureThe term wealth is used to refer to the total of all stores of value including both money and nonmonetary assetsLiquidity the ease with which an asset can be converted into the economys medium of exchangeBecause money is the economys medium of exchange it is the most liquid assetMost stocks and bonds can be sold easily with small cost so they are relatively liquidSelling a house painting or hockey card requires more time and effort thus are less liquidThe kinds of money Commodity money money that takes the form of a commodity with intrinsic value Intrinsic valuethe item would have value even if it were not used as money Example of commodity money goldhas intrinsic value because it is used in industry and in the making of jewelry
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