week 1 Flashcards
What is the relationship between the development of money and central banks?
The development of money is linked to the development of central banks.
What is unique about money compared to other commodities?
Money is unique; it is not a commodity.
What is the yield curve?
The yield curve is the relationship between interest rates and yields.
What are the key properties of any money?
- Medium of exchange for buying things
- Unit of account for pricing
- Store of value for saving
What are the three types of money?
- Commodity money
- Representative money
- Fiat money
What is commodity money?
Commodity money has value even when it is not used as money, derived from the commodity it is made from.
What characterizes representative money?
Representative money has little to no value of its own but can be exchanged for an underlying commodity.
What is fiat money?
Fiat money is government-issued currency not backed by a commodity.
What historical transition occurred in Britain in 1931?
Britain left the gold standard and transitioned to fiat money.
What was one significant effect of introducing paper money?
The introduction of paper money raised the rate of economic growth and changed commerce and government finance.
What did the introduction of paper money reduce?
Paper money reduced transaction costs compared to commodity money.
What is a financial asset?
A financial asset is a claim on another agent (person, firm, bank, gov.).
What is a financial liability?
A financial liability is a debt; one person’s financial asset is another person’s debt.
True or False: Fiat money is a scam.
False; fiat money is a useful social institution.
What backs modern fiat money?
Modern fiat money is created by the central bank and backed by the state.
What is legal tender?
Legal tender is currency that can be used to settle or clear a debt in court.
What are the advantages of fiat money?
- Solution to coordination/trust problem with IOUs
- Backed by the state
- Legal tender
- Socially accepted
- Enables closer monetary policy control
What is the significance of trust in the fiat money system?
Trust holds up the fiat money system, as modern currency is divorced from any real value apart from the value we give it.
Fill in the blank: Commodity money has a value of its own, which gives confidence in continued ability to _______.
trade.
