25.1 What is money and why we need it?

What is money?

Any asset that people are generally willing to accept in exchange for goods and Services or for payments of debts.

What is an asset

Anything of value owned by a person or firm

Why do we need money?

By making exchange easier, money allows people to specialize and become more productive.

What is Commodity money?

Commodity money has value independent of its usage as money, for instance Gold was historically used as commodity money.

What are the functions of money

1. Act as a medium of exchange 2. Serve as a unit of account 3. Serve as a store of value 4. Offer a standard of deferred payment

What are the five criteria that make a medium suitable to serve as money?

1. Must be acceptable (that is usable by) most people 2. Standardized quality so that any two units are identical 3. Durable so that value is not lost by spoilage 4. Valuable relative to its weight so that amounts large enough to be useful in trade can easily be transported. 5. Divisible so that it can be used in purchased of both low-priced and high priced goods.

What is commodity money?

A good used as money that also has value independent of its use as money.

What is a unit of account?

A unit of account is a way of measuring value in the economy in terms of money.

What is a barter trade?

Each person must want what the other one has. Economists refer to this requirement as double coincidence of wants.

What is legal tender?

Federal Reserve Currency is legal tender, which means the federal government requires that it be accepted in payment of debts and requires that cash or checks denominated in dollars be used in payment of taxes.

What determines the acceptance of the US dollar?

Households and forms have confidence that if they accept paper dollars in exchange for goods and services, the dollars will not lose much value during the time they hold them.

How does money offers a standard of deferred payment?

Money can serve as a standard of deferred payment by facilitating exchange at a given point in time by providing a medium of exchange and unit of account. Money can facilitate exchange over time, for instance buy now and pay in 60 days.

How does money stores value?

Money serves as a value storage for future usage. Money is the most liquid asset and thus can be used without conversation cost.

What is fiat money?

Money, such as paper currency, that is authorized by a central bank and that has no value unless it is used as money.

How important is it that money be a reliable store of value and standard of payment?

People care how much goods and services their dollars can buy, thus money depends on in its purchasing power to be reliable.

What is the essence of a money system?

People only sell what they have for money and then use the money to buy what they want. When money is available, people are more likely to specialize and less likely to produce (nearly) everything they need themselves.

What determines the acceptability of dollar bills as a medium of exchange?

Self-fulfilling expectations: You value something as money if you believe that others will accept it. A society's willingness to use paper dollars as money makes them an acceptable medium.

What is the federal reserve?

The central bank of the United States

What is liquidity.

The ease with which people an convert an asset into the medium of exchange.

What are the problems with commodity money?

Value depends on purity. Supply is difficult to control because of unpredictable mining discoveries. Difficult to transport.

What is a Barter economy?

When goods and services are traded directly without money

What is a medium of exchange?

With a medium of exchange, people can sell goods and services for money and use the money to buy what they want. An economy is more efficient when people accept a single good as a medium of exchange.