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EC223 (81)
Chapter 3

Chapter 3 EC223.docx

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Department
Economics
Course
EC223
Professor
Angela Trimarchi
Semester
Winter

Description
EC223 Chapter 3 – What is Money? Week 3 Meaning of Money -Economists define money as anything that is generally accepted in payment for goods or services or in the repayment of debts -Currency, consisting of dollar bills and coins is one type of money -Wealth includes not only money but also other assets such as bonds, common stock, art, land, furniture, cars, and houses -Income is a flow of earnings per unit of time Functions of Money -Money has three primary functions in any economy: as a medium of exchange, as a unit of account, and as a store of value Medium of Exchange -It is used to pay for goods and services -The use of money as a medium of exchange promotes economic efficiency by eliminating much of the time spent in exchanging goods and services -The time spent trying to exchange goods or services is called a transaction cost -Money is a lubricant that allows the economy to run more smoothly by lowering transaction costs, thereby encouraging specialization and the division of labour -For a commodity to function effectively as money, it has to meet several criteria: -It must be easily standardized making it simple to ascertain its value -It must be widely accepted -It must be divisible so that it is easy to “make change” -It must be easy to carry -It must not deteriorate quickly Unit of Account -It is used to measure value in the economy -We introduce money into the economy and have all prices quoted in terms of units of that money, enabling us to quote the price of economic lectures, peaches, and movies in terms of, say, dollars -Using money as a unit of account reduces transaction costs in an economy by reducing the number of prices that need to be considered Store of Value -It is a repository of purchasing power over time -Used to save purchasing power from the time income is received until the time it is spent -Most of us do not want to spend out income immediately upon receiving it but rather prefer to wait until we have the time or desire to shop -Liquidity is the relative ease and speed with which an asset can be converted into anything else in order to make purchases -Hyperinflation is when the inflation rate exceeds 50% per month Evolution of the Payments System -The payments system is the method of conducting transactions in the economy EC223 Chapter 3 – What is Money? Week 3 Commodity Money -For any object to function as money, it must be universally acceptable; everyone must be willing to take it in payment for goods and services -Money made up of precious metals or another valuable commodity is called commodity money -The problem with a payments system based exclusively on precious metals is that such a form of money is very heavy and is hard to transport from one place to another Fiat Money -The next development was paper currency -Fiat money is paper currency decreed by governments as legal tender but not convertible into coins or precious metal -They were easily stolen Cheques -A cheque is an instrument from you to your bank used to transfer money from your account to someone else’s account when she deposits the cheque -With cheques, payments that cancel each other can be settled by cancelling the cheques and no currency needs to be moved -Cheques are advantageous in that loss from theft is greatly reduced, and they provide convenient receipts for purchases -It takes time to get cheques from one place to another -All the paper shuffling required to process cheques is costly Electronic Payment -Cheap to pay bills electronically -Electronic payment systems provided by banks now even spare you the step of logging on to pay bills – instead, recurring bills can be automatically deducted from your bank account E-Money -Electronic money (e-money) is money that exists only in electronic form -The first form of e-money was the debit card -Debit cards enable customers to purchase goods and services by electronically transferring funds directly from their bank accounts to a merchant’s account -A more advanced form of e-money is the stored-value card – purchased for a preset dollar amount that the consumer pays up front like a pre-paid phone card -A smart card contains a comp
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