Chapter 27 and 28 Flashcards
The three functions of money are
Medium of exchange
Store of value
Unit of account
Medium of exchange
use item to buy goods and services; an object that is generally accepted in return for goods and services.
Store of value
use item to transfer purchasing power to the future; any commodity or token that can be held and exchanged later for goods and services.
Unit of account
use item to denote prices and debts
an agreed-upon measure for stating the prices of goods and services.
Money in the world today is called
fiat money.
Fiat Money
objects that are money because the law decrees or orders them to be money.
The objects that we use as money today are
Currency; Deposits at banks and other financial institutions
The notes (dollar bills) and coins that we use in the United States today are known as _
currency
Notes are money because
the government declares them to be with the words printed on every dollar bill.
The words printed on every dollar bill:
This note is legal tender for all debts, public and private
Deposits at ___ are also money.
banks, credit unions, savings banks, and savings and loan associations
Deposits are money because they
can be converted into currency on demand and are used directly to make payments.
Quantity of money demanded is
the amount of money that households and firms choose to hold.
Benefit of Holding Money
The benefit of holding money is the ability to make payments; the more money you hold, the easier it is for you to make payments.
The opportunity cost of holding money is
the interest forgone on an alternative asset.
the opportunity cost of holding money is the nominal interest because
it is the sum of the real interest rate on an alternative asset plus the expected inflation rate, which is the rate at which money loses buying power.
We hold money for two reasons
Transaction Demand, Asset Demand
Transaction Demand
Holding money in our bank account so we can buy stuff.
Asset Demand
Liquidity preference in which money is kept as a store of value for later use.
A change in the nominal interest rate brings a
change in the quantity of money demanded.
A change in any other influence on money holdings changes __
the demand for money.
The three main influences are
The price level; Real GDP; Financial technology
The price level
need more money to pay for goods and services
Real GDP
increases in expenditures and incomes