The Monetary System

Money and Prices in the Long Run

11/6/13

Review
Barter The exchange of one good or service for another Double Coincidence Wants the likelihood that two people, each would of goods or service the other wants. Money is the set of assets in the economy that people regularly use to buy goods and services from each other.

The Functions of Money

Money has 3 functions in the economy 1. Medium of exchange 2. A store of value 3. A unit of account

1- Medium of Exchange

Is an item that buyers give to sellers when they purchase goods and services

2-Store of Value
An item that people can use to transfer purchasing power from the present to the future. A person can also transfer purchasing power from present to future by holding nonmonetary assets: stocks, bonds Therefore the term wealth, can be referred to the total of all stores of value, including both money and nonmonetary assests.

3-Unit of Account
The yardstick Is the yardstick people use to post prices and records debts.

Terms
Intrinsic value the item have value even if it were not used as money ex. Gold, cigarettes. When an economy uses gold to back up their money, or, when a country can change their medium of exchange (paper money) on demand for gold,it is said to be operating under a gold standard Ex. Cigarettes as commodity (intrinsic or not) Liquidity describe the ease with which an asset can be converted into the economys medium of exchange.

The Kinds of Money

Fiat money with no intrinsic value ( it is not backed by gold nor cigarettes) rather it is because the government says so, we agree/willing for it to be and it says so this note is legal tender for all debts, public and private Commodity of money This is when money takes a form with intrinsic value: cigarettes, gold

Other forms used

Know the difference between use value & exchange value

When Money Decreases in its Value

Money in the U.S. Economy

The quantity of money circulating in the economy is called Money Stock this has powerful influence on many economic variables Questions What is the quantity of money? or What can be counted in the U.S. Money Stock

Measure of Money Stock

Pop Quiz
List and describe the 3 functions of money What is intrinsic value? What can be considered a commodity, why? Pass up front

To each in our society

Your cash or check represents a claim to goods and services in the future.