Role of Money in Modern Economics
Chapter11: Money, Banking & the Financial Sector
I. Money
A. Money is defined as anything people accept for goods and services. In modern economies, money is national currency.
B. In the absence of money, societies use a “barter” system in which goods are exchanged for goods.
1. Barter economies require a “Double Coincidence of Demand” in that the two market participants must each be supplying what the other demands.
2. Barter also implies negotiations over the exchange (a cost modern economies often avoid), which have the economic cost of the time spent for each purchase an individual makes.
C. In a more Modern System, paper currency is the means of exchange. Society’s acceptance of it for goods and services gives money its value. President Nixon took the US off the gold standard in 1971 in response to a massive wave of people redeeming gold for dollars. The panic was induced by double-digit inflation.
D. Functions of Money:
1. As a “Medium of exchange,” money exchanges are far more convenient than barter, as they do not require any double coincidence of demand.
2. As a “Standard of value” or monetary unit, the value of any good or service can be compared, whether the goods being compared are very similar to each other or extremely different.
3. As a “Store of value” money enables saving, although inflation can diminish this function. It does not deteriorate (rot) like many commodities, and the ability to earn interest increases the utility of this function.
4. As a “Means of deferred payment,” money facilitates the credit system (includes credit cards and payment plans for durable good purchases) and all other types of loans.
E. The purposes people hold money are:
1. Transaction – regular purchases
2. Precautionary – emergency costs or unexpected income adjustments
3. Speculative – stocks or goods purchased in the expectation their value will increase in the future.
II. Money Supply: Money in our economy is demand deposits plus currency and coin.
A.
I. Money
A. Money is defined as anything people accept for goods and services. In modern economies, money is national currency.
B. In the absence of money, societies use a “barter” system in which goods are exchanged for goods.
1. Barter economies require a “Double Coincidence of Demand” in that the two market participants must each be supplying what the other demands.
2. Barter also implies negotiations over the exchange (a cost modern economies often avoid), which have the economic cost of the time spent for each purchase an individual makes.
C. In a more Modern System, paper currency is the means of exchange. Society’s acceptance of it for goods and services gives money its value. President Nixon took the US off the gold standard in 1971 in response to a massive wave of people redeeming gold for dollars. The panic was induced by double-digit inflation.
D. Functions of Money:
1. As a “Medium of exchange,” money exchanges are far more convenient than barter, as they do not require any double coincidence of demand.
2. As a “Standard of value” or monetary unit, the value of any good or service can be compared, whether the goods being compared are very similar to each other or extremely different.
3. As a “Store of value” money enables saving, although inflation can diminish this function. It does not deteriorate (rot) like many commodities, and the ability to earn interest increases the utility of this function.
4. As a “Means of deferred payment,” money facilitates the credit system (includes credit cards and payment plans for durable good purchases) and all other types of loans.
E. The purposes people hold money are:
1. Transaction – regular purchases
2. Precautionary – emergency costs or unexpected income adjustments
3. Speculative – stocks or goods purchased in the expectation their value will increase in the future.
II. Money Supply: Money in our economy is demand deposits plus currency and coin.
A.