ECON 351 Chapter Notes - Chapter 3: Barter, Commodity Money, Transaction Cost
Document Summary
Functions of money: medium of exchange: used to pay for goods and services. Money"s function as a medium of exchange is what distinguishes it from other assets such as stocks, bonds, and houses. Transaction cost: the time spent trying to exchange goods/services; in barter economy, people have to satisfy a double coincidence of wants . Money is a lubricant that allows the economy to run more smoothly by lowering transaction costs, thereby encouraging specialization and division of labor. Payments system: the method of conducting transactions in the economy: commodity money: money made up of precious metals or another valuable commodity. Textbook outline: fiat money: paper currency decreed by governments as legal tender but not convertible into coins or precious metal. Can be accepted as a medium of exchange only if there is some trust in the authorities who issue it and if printing has reached a sufficiently advanced stage that counterfeiting is extremely difficult: checks.
