11.1 The Nature of Money Flashcards
What is money?
Money is any generally accepted medium of exchange, which means anything widely accepted in a society in exchange for goods and services.
What is a Medium of Exchange?
Anything that is generally accepted in return for goods and services sold.
Other than a medium of echange, what other roles does money have?
Although its medium-of-exchange role is perhaps its most important one, money also acts as a store of value and as a unit of account.
Defiition of Barter
A system in which goods and services are traded directly for other goods and services.
What is the major difficulty with barter?
The major difficulty with barter is that each transaction requires a double coincidence of wants
What is a double coincidence of wants?
A double coincidence of wants: Anyone who specialized in producing one commodity would have to spend a lot of time searching for satisfactory transactions.
The double coincidence of wants is unnecessary when a medium of exchange is used.
What does money make possible?
By facilitating transactions, money makes possible the benefits of specialization and the division of labour,
To serve as an efficient medium of exchange, money must have a number of characteristics…
It must be both easily recognizable and readily acceptable.
It must have a high value relative to its weight, because otherwise it would be a nuisance to carry around.
It must be divisible, because money that comes only in large denominations is useless for transactions having only a small value.
It must also be reasonably durable.
It must be difficult, if not impossible, to counterfeit.
Why is money a store pf purchasing power?
Money is a convenient means of storing purchasing power; goods may be sold today for money and the money may then be set aside until it is needed for some future purchase.
What condition must be fulfilled in order for something to be a satisfactory store of value?
To be a satisfactory store of value, however, money’s purchasing power should be relatively stable over time.
Why is money used for accounting?
Money is also used for accounting, and its use for such purpose does not rely on its physical existence. Canadian businesses, governments, and households all record their financial accounts in terms of dollars. Expenditures and receipts and deficits and surpluses are computed in dollar terms even without the immediate presence of physical money.
Does money need to have a physical presence?
Note that money need not have a physical presence to serve as a medium of exchange, a store of value, and a unit of account.
What does your bank deposit serve as?
Your bank deposit serves as a medium of exchange.
Serves as a good store of value, as long as inflation is low.
Finally, your bank account is clearly useful as a unit of account.
Why were precious metals the origional money?
They were precious because their supplies were relatively limited, and they were in constant demand by the wealthy for ornament and decoration. Further, they were easily recognized, they were divisible into extremely small units, and they did not easily wear out. For these reasons, precious metals came to circulate as money and to be used in many transactions.
Before coins, how were purchaces made?
Before the invention of coins, it was necessary to carry the metals in bulk. When a purchase was made, the requisite quantity of the metal was carefully weighed on a scale.
What did the invention of coinage eliminate?
The invention of coinage eliminated the need to weigh the metal at each transaction, but it created an important role for an authority, usually a king or queen, who made the coins and affixed their seal, guaranteeing the amount of precious metal that the coin contained.
What was the practivce of clipping?
However, coins often could not be taken at their face value. The practice of clipping a thin slice off the edge of the coin and keeping the valuable metal became common. This, of course, served to undermine the acceptability of coins, even if they were stamped.
What is milling and how did it get around the problem of clipping?
To get around this problem, the idea arose of minting the coins with a rough edge. The absence of the rough edge would immediately indicate that the coin had been clipped. This practice, called milling, survives on Canadian dimes, quarters, and two-dollar coins as an interesting anachronism to remind us that there were days when the market value of the metal in the coin was equal to the face value of the coin.
What is debasing?
When old kings or rules would add additional metal to coins they were having newly minted
Through debasement, the amount of money in the economy (but not the amount of gold) had increased.
What was the ventual result of debasement?
The eventual result of such debasement was inflation. The subjects had the same number of coins as before and hence could demand the same quantity of goods. When rulers paid their bills, however, the recipients of the extra coins could be expected to spend them. This caused a net increase in demand, which in turn bid up prices. Thus, increasing the money supply by debasing the coinage was a common cause of inflation.
What is Gresham’s Law?
Gresham’s Law
The theory that “bad,” or debased, money drives “good,” or undebased, money out of circulation.
What does Gresham’s Law predict?
Gresham’s Law predicts that when two types of money are used side by side, the one with the greater intrinsic value will be driven out of circulation.
What was essentially the invention of paper money?
If people knew the goldsmith to be reliable, there was no need to go through the cumbersome and risky business of physically transferring the gold. The buyer needed only to transfer the goldsmith’s receipt to the seller, who would accept it as long as they were confident that the goldsmith would pay over the gold whenever it was needed. This transferring of paper receipts rather than gold was essentially the invention of paper money.
When paper money first came into being, what did it represent?
When it first came into being, paper money represented a promise to pay so much gold on demand. In this case, the promise was made first by goldsmiths and later by banks. Such paper money was backed by precious metal and was convertible on demand into this metal.
