Chapter 10 - The Monetary System

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23 Apr 2012
Wednesday March 14th, 2012
Chapter 10
The Monetary System
What Money is and Why It’s Important:
-without money, trade would require barter; the exchange of one good or service for another
-every transaction would require a double coincidence of wants; the unlikely occurrence that two
people each have a good the other wants
Simply means that two people have to want each other’s stuff
To ensure a double coincidence of wants you introduce $
-Most people would have to spend time searching for others to trade with a huge waste of resources
-this searching is unnecessary with money, the set of assets that people regularly use to buy g&s (goods
and services) from other people
-money is nothing, money is everything/anything
-Example: I’m an economics professor, but I’m a consumer, too. Suppose I want to go out for a beer.
Under a barter system, I would have to search for a bartender that was willing to give me a beer in
exchange for a lecture on economics. As you might imagine, I would have to spend a LOT of time
searching. (On the plus side, this would prevent me from becoming an alcoholic.)
But thanks to money, I can go directly to my favorite pub and get a cold beer; the bartender doesn’t
have to want to hear my lecture, he only has to want my money.
The 3 Functions of Money:
1. Medium of Exchange:
an item buyers give to sellers when they want to purchase g&s (goods and services)
basically means you use money to buy stuff
it has be universally accepted
2. Unit of Account:
the yardstick people use to post prices and record debts
price or monetary value of virtually everything is measured in the same units dollars
Imagine how hard it would be to plan your budget or comparison shop if sellers
each used their own system of measuring prices
Has to be exchanged in payment
3. Store of Value:
an item people can use to transfer purchasing power from the present to the future
money holds its value over time, so you don’t have to spend it immediately upon
receiving it
contains value for present and future
The 2 Kinds of Money:
-money is money because the government says so
1. Commodity Money:
takes the form of a commodity with intrinsic value
intrinsic value basically means that commodity money would still have value
even if it wasn’t being used
Example: gold coins, cigarettes in POW camps
In the film “The Shawshank Redemption,” prisoners use cigarettes as
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