week 1 Flashcards
What are the key properties of money?
The key properties of money include its roles, functions, and uses.
What historical developments led to fiat money?
Historical developments include the evolution from commodity money to representative money, and eventually to fiat money.
What are the differences between commodity, representative, and fiat money?
- Commodity money is based on valuable goods
- Representative money is backed by a physical commodity
- Fiat money is not backed by any physical commodity
What are some advantages of fiat money?
- Easier to carry and exchange
- Allows for more flexible monetary policy
- Reduces transaction costs compared to commodity money
What potential problems are associated with fiat money?
- Dependence on trust in government and institutions
- Susceptibility to inflation
- Risk of devaluation
How is money classified in a balance sheet?
Money is classified as both an asset and a liability.
What is commodity money?
Commodity money involves using goods or assets that have intrinsic value.
What is representative money?
Representative money is a currency that is backed by a physical commodity.
What is fiat money?
Fiat money is a currency that is not backed by a physical commodity and is declared legal tender by government decree.
What significant change occurred in 1931 regarding the Bank of England?
The Bank of England began issuing notes as fiat money.
What is the role of trust in fiat money?
Trust is essential as fiat money holds value only due to the belief in its stability and the issuing authority.
True or False: Fiat money is a scam.
False: Fiat money is considered a useful social institution.
What is fractional reserve banking?
Fractional reserve banking is when banks lend more money than they hold in reserves, based on the assumption that not all depositors will withdraw their funds at once.
Fill in the blank: Money represents a financial _______.
liability
What are some features of a fiat money system?
- Backed by the state
- Socially accepted
- Difficult to counterfeit
- Controlled supply relative to demand
What historical figure contributed to the understanding of money in the West?
Marco Polo
What did the introduction of paper money change in the economy?
It raised the rate of economic growth and transformed commerce and government finance.
What challenges did commodity money face?
- Debasement
- Inflationary pressures
- Insufficient supply
What is an IOU in the context of monetary history?
An IOU is a paper promising convertibility to an underlying commodity currency.
What is the significance of the central bank in a fiat money system?
The central bank is the sole issuer of currency and is backed by the government.
How does fiat money solve the problem of coordinating wants?
Fiat money provides a universally accepted medium of exchange.
What happened to the UK in 1931 regarding the Gold Standard?
The UK exited the Gold Standard, allowing for the devaluation of currency.
