Part 5 [Money, and Prices in the Long Run] - 10. the monetary system - 11. money growth and inflation Flashcards
How is the social custom of using money for transaction extraordinarily useful in a large, complex society?
If there were no item in the economy that was widely accepted in exchange for goods and services, people would have to rely on barter - the exchange of one good or service for another - to obtain the things they need.
Why are people willing to work hard for pieces of paper (money) which are intrinsically worthless?
Because people are confident that in the future, some third person will accept it in exchange for something that the individual values. Money represents a claim to goods and services in the future.
Why will an economy that relies on barter have a trouble allocating its scarce resources?
In such an economy, trade is said to require the double coincidence of wants - the unlikely occurrence that two people each have a good or service that the other wants.
How does money make trade easier?
By allowing each person to specialize in what they do best and raising everyone’s standard of living.
Define money.
The set of assets in an economy that people regularly use to buy goods and services from other people.
What are the three functions of money in the economy?
- Medium of exchange
- Unit of account
- Store of value
What is a medium of exchange?
An item that buyers give to sellers when they want to purchase goods or services.
What is a unit of account?
The yardstick people use to post prices and record debt.
What is a store of value?
An item that people can use to transfer purchasing power from the present to the future.
What is liquidity?
The ease with which an asset can be converted into the economy;s medium of exchange.
What do people need to do when deciding in what form to hold their wealth?
They have to balance the liquidity of each possible asset against the asset’s usefulness as a store of value.
What is the most liquid asset?
Money
Although money is the most liquid asset, how is it far from perfect as a store of value?
When prices rise, the value of money falls; when goods and services become more expensive, each dollar can buy less.
What are the two general types of money?
Commodity money and fiat money.
What is commodity money?
Money that takes the form of a commodity with intrinsic value, that is, that the item would have value even if it were not used as money.
