Economics Chapter 26 The monetary system
In the economy of a long time ago, people would have to rely on barter.
Barter – the exchange of one good or service for another.
Double coincidence of wants – a situation in exchange where two people each have a good
or service that the other wants, and thus enter into an exchange.
This chapter:
- what is money?
- which various forms does money takes?
- how the banking system helps create money
- how the central banks controls the quantity of money in circulation
Meaning of money
Money – the set of assets in an economy that people regularly use to buy goods and services
from other people.
Money has 3 functions in the economy:
- A medium of exchange
- A unit of account
- A store of value
A medium of exchange – an item that buyers give to sellers when they want to purchase
goods or services.
A unit of account – the yardstick people use to post prices and record debts.
A store of value – an item that people can use to transfer purchasing power from the
present to the future.
Wealth – the total of all stores of value, including both money and non-monetary
assets.
Liquidity – the ease with which an asset can be converted into the economy’s medium of
exchange.
2 kinds of money:
- Commodity money
- Fiat money
Commodity money – money that takes the form of a commodity with intrinsic value.
Intrinsic value – means that the item would have value even if it were not used as money
(like gold).
Fiat money – money without intrinsic value that is used as money, because of government
decree.
In the economy of a long time ago, people would have to rely on barter.
Barter – the exchange of one good or service for another.
Double coincidence of wants – a situation in exchange where two people each have a good
or service that the other wants, and thus enter into an exchange.
This chapter:
- what is money?
- which various forms does money takes?
- how the banking system helps create money
- how the central banks controls the quantity of money in circulation
Meaning of money
Money – the set of assets in an economy that people regularly use to buy goods and services
from other people.
Money has 3 functions in the economy:
- A medium of exchange
- A unit of account
- A store of value
A medium of exchange – an item that buyers give to sellers when they want to purchase
goods or services.
A unit of account – the yardstick people use to post prices and record debts.
A store of value – an item that people can use to transfer purchasing power from the
present to the future.
Wealth – the total of all stores of value, including both money and non-monetary
assets.
Liquidity – the ease with which an asset can be converted into the economy’s medium of
exchange.
2 kinds of money:
- Commodity money
- Fiat money
Commodity money – money that takes the form of a commodity with intrinsic value.
Intrinsic value – means that the item would have value even if it were not used as money
(like gold).
Fiat money – money without intrinsic value that is used as money, because of government
decree.
