Econ Chapter 14 Quiz

Pesos were known as

"pieces of eight" because they were divided into 8 subparts known as "bits" -pesos resembled the Austrian talers, they were nicknamed "talers" which sounds similar to the word dollars -term became so popular that the dollar became the basic monetary unit -decided into tenths (easier to understand) -a 25-cent coin (one quarter of a dollar- "two bits"

Third Characteristic of money:

-divisible into smaller units so that people can use only as much as they need for a transaction -would cut blocks of tea or cheese -bundles of tobacco leaves could be easily be broken apart -even pesos were cut with a knife into eights to make "bits" for payment

Second characteristic of money:

-durable: does not deteriorate when it is handled -most was durable -even the fiat paper money of the colonial period was durable in the sense that it could be easily replaced by new bills when old ones became worn

Second Function of Money:

-measure of value: a common measuring stick that can be used to express worth in terms most individuals understand -what we observe whenever we see a price tag on something -a value that we can use to make comparisons with other products -in US, our measure of value is expressed in dollars and cents

First Function of Money:

-medium of exchange: something accepted by all parties as payment for goods and services -have used gold, silver, and even salt -in ancient Rome, salt was so valuable that each soldier received an annual salt payment called a "salarium"; the modern term for an annual income - salary-is based on this Latin term

Fourth Characteristic of money:

-must be available, but only in LIMITED SUPPLY -stones were used for Yap islands (carried in open canoes- 400 miles away- only 1 in 20 completed the round-trip making it limited -money loses its values whenever there is too much of it -wampum even lost its value when settlers used industrial dyes to turn white shells into purple (thereby doubling their value)

First characteristic of money:

-portable: or easily transferred from one person to another, to make the exchange of money for products easier -most money in early societies was very portable -shells, wampum, tobacco, compressed blocks of tea

Modern money:

-several different types of money (some is the form of Federal Reserve notes and some in the form of metallic coins issued by the U.S. Bureau of the Mint -other forms of money include demand deposit accounts (DDAs), or funds deposited in a bank that can be accessed by writing a check and without having to secure prior approval of the insit.

Third Function of Money:

-store of value: the quality that allows purchasing power to be saved until needed -goods or services can be converted into money, which is easily stored until needed -this feature of money allows a period of time to pass between earning and spending an income

Fed issues paper currency known as

Federal Reserve Notes (paper currency issued by Fed in use today) -key part of our money supply

Most money issued by the

Federal Reserve System (Fed)

Barter economy

a moneyless economy that relies on trade -without money, would be difficult b/c products some people have to offer are not always acceptable or easy to divide for payment (unless there is a "mutual coincidence of wants")

As a result, money came in

a variety of forms, shapes and sizes

A broader definition is M2, which includes

M! along with savings deposits, time deposits, and money market funds -all of which relate to money's function as a store of value

Fed uses different definitions for the money supply. The first is M1, which includes

coins and currency, traveler's checks, DDAs, and checking accounts held at other depository institution -the def. of money supply relates to money's function as a medium of exchange

Today, this money would be classified as

commodity money (money that has an alternative use as an economic good, or commodity)

In early colonial America,

corn and even animal pelts were used as form of money

Many products, such as

corn, hemp, gunpowder, and musket balls served as commodity money (could settle debts and make purchases) and colonists could consume these products if necessary

Money used by early settlers in American colonies was similar to that

found in early societies -some consisted of commodity money and some as fiat money

Compressed cheese was used in early

Russian trade

The most popular coin in the colonies was the

Spanish peso that came to America through trade and piracy -Spanish mining silver in Mexico, they melted the silver into bullion (ingots or bars of precious metals) or minted it into coins for shipment to Spain -Spanish treasure ships often became victims of Caribbean pirates who spent their stolen treasure in America's southern colines

Our money now shares the same fundamental characteristics and

functions of money. -portable: light-weight, convenient, easily transferred from one person to another (checks) -durable: metallic coins last about 20 years under normal use; paper currency is also reasonably durable, with a $1 bill lasting about 18 months in circulation; introduction of Sacagawea dollar coin by replacing $1 bill with longer lasting coins -divisible: the penny, the smallest denomination of coin, is small enough for almost any purchase and people can write checks for the extra amount of a purchase -money has an uneven track record when it comes to limited availability and stability in value: grow at 10 to 12 % a year in 1970s and contributed to inflation in 1980s (slowed considerably since then, which has led to a period of price stability)

The use of money developed because it makes

life easier for people and serves everyone's best interests -money has become a social convention (like general acceptance of laws and gov.)

Life is simpler in an economy with

money

Fiat money

money by government decree, such as tiny metallic coins used in Asia Minor in the 7th century B.C. (served as money b/c gov. said they were money)

Tea leaves compressed into "bricks" comprised

money in ancient China

The "triangular trade" between the colonies, Africa and the Caribbean bought

more pesos to America -traders took molasses and pesos from the Caribbean to the colonies, sold molasses to be made into rum and spent their pesos on other goods, the rum was shipped to Africa, where it was traded for enslaved Africans, the enslaved Africans were taken to the Caribbean to be sold for pesos and more molasses and pesos were taken to the colonies

Americans used other forms of money as times passed. In some cases, state laws allowed individuals to print their own

paper currency. Usually backed by gold and silver deposits in banks, it served as currency for the immediate area. States even printed money in the form of anticipation notes and used them to pay salaries, buy supplies, and meet other expenditures until they received taxes and redeemed the notes.

The Continental Congress issued

paper money to finance the Revolutionary War. In 1775 it printed Continental dollars, a form of fiat paper currency with no gold or silver backing. By the end of the war, nearly one-quarter billion Continental dollars had been printed- a volume so large that it was virtually worthless by the end of the revolution.

Fed

privately owned, publicly controlled central bank of the US

Colonists also used modest amounts of

specie (or money in the form of silver or gold coins). -included English shillings, austrian talers, and various European coins that immigrants had brought to the colonies -coins were the most desirable form of money, not only because of their mineral content, but b/c they were in limited supply

Monetary unit, or

standard unit of currency, in the U.S. money system

A commonly accepted commodity money was

tobacco, for which the governor of colonial Virginia set a value of 3 english shillings per pound in 1618 -2 years later, colonists used some of this money to bring wives to the colonies

The study of early money is useful because it helps us

understand the characteristics that give money its value -any substance can serve as money if it possesses four main characteristics

People used things that were easily available and

valued by others as a form of money

1637 Massachusetts est. a monetary value for

wampum, a form of currency the Wampanoag Native Americans made out of white and purple mussel shells (Wampanoag and settlers used these shells in trade) -white shells more plentiful than purple shells (would dye them to have more value) -english penny was made to equal 6 white or 3 purple shells