Intro to Money

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• What do the following terms have to do with money?

• Goods

• Services

• Scarcity

• Capital

What is Money?

Money

• Money: serves as a medium of exchange, a unit of account, and a store of value

– Provides the means for comparing values of goods and services, and serves as a store of value

The Three Uses of Money

• A

Medium of Exchange

is anything that is used to determine value during the exchange of goods and services

Value

– Without money, people may acquire goods and services through the

barter

system: exchange one set of goods and services for another

– Still used in traditional economies in many parts of the world

The Three Uses of Money

• Money as a

Unit of Account

is a means of comparing the values of goods and services

• Ex: comparison shopping from store to store

• What’s it worth to you???

The Three Uses of Money

• Money also serves as a

Store of

Value

: something that keeps value if stored, rather than spent

• Ex: savings

The Six Characteristics of Money

1.

Durability

: objects used as money must withstand the physical wear and tear that comes with being used over and over again

The Six Characteristics of Money

2.

Portability

: people need to be able to take money with them as they go about their day

– must be able to transfer money easily from one person to another

The Six Characteristics of Money

3.

Divisibility

: must be easily divided into smaller units of value

(denominations)

The Six Characteristics of Money

4.

Uniformity

: people must be able to count and measure money accurately

The Six Characteristics of Money

5.

Limited Supply

:

In the US, the

Federal Reserve controls the supply of money in circulation

The Six Characteristics of Money

6.

Acceptability

: everyone in an economy must be able to take the objects that serve as money and exchange them for goods and services

What makes money valuable?

Sources of Money’s Value

Commodity Money

: objects that have value in and of themselves, and that are also used as money

• Ex: salt, cattle, precious stones

Sources of Money’s Value

Representative Money

: objects that have value because the holder can exchange them for something else of value

• Ex: gold or silver

• Specie: coined money, usually gold or silver, used to back paper money

Sources of Money’s Value

Fiat Money

: objects that have value because a government has decreed that they are an acceptable means to pay debts

– Legal tender

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