4.3: Definition, Measurement, and Functions Of Money Flashcards
The Barter System
Goods and services are traded directly. There is no money exchanged.
What are the problems of the Barter System?
“Double Coincidence of Wants”: Each trader has to have something the other wanted, before trade can occur.
- Some goods cannot be split. If 1 goat worth 5 chickens. If I want 1 chicken, I can’t get 1 chicken because that requires cutting up the goat.
Money
Anything that is generally accepted as payment for goods and services
Not wealth or income
Wealth
The total collection of assets
Income
A flow of earnings per unit of time
Commodity Money
Something that performs the function of money and has intrinsic value.
Gold, silver, cigarettes, etc
Fiat Money
Something that serves as money but has no other value
Paper Money, Coins, Digital Currency
What are the 3 functions of money?
- A medium of exchange
— Money can easily be used to buy goods and services w/ no complications of barter system. - A Unit of Account ( Measure of Value)
— Money measures the value of all goods and services. Money acts as a measurement of values.
1 goat = $50 = 5 chickens or 1 chicken = $ 10
- A Store of Value
—Money allows you to store purchasing power for the future.
Which of the following is not a function of fiat money?
A) A standard of deferred payment
B) a unit of account
C) A source of intrinsic value
D) A store of value
E) a medium of exchange
C
A barter economy is different from money economy in that a barter economy
A) encourages specialization and division of labor
B) involved higher costs for each transaction
C) eliminates the need for a double coincidence of wants
D) has only a few assets that serve as medium of exchange
E) promotes market exchange
B
Liquidity
Ease w/ which an asset can be accessed and used as a medium of exchange.
What is M1
Highest liquidity
1) currency in circulation
2) checkable bank deposits ( checking accounts)
3) Traveler’s checks
What is M2
Near Money - M1 plus the following
- Saving deposits (money market accounts)
- Time deposits (CDs= certificates of deposit)
- Money market funds.
What is opportunity cost of holding liquid money?
The interest you could be earning if you purchased an interest-earning asset
In the narrowest definition of money, M1, saving accounts are excluded because they are
A) not a medium of exchange
B) not insured by federal deposit insurance
C) available from financial institutions other than banks
D) a store of purchasing power
E) interest-paying accounts
A
