Money and Banking Ch3

Chapter 3 What Is Money?

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Meaning of Money

• Money: anything that is generally accepted in payment for goods or services or in the repayment of debts.

• A rather broad definition Money is what money does!

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Meaning of Money

• Money (a stock concept) is different from: • Wealth: the total collection of pieces of property that serve to store value

• Income: flow of earnings per unit of time (a flow concept)

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Barter System – No Money

• Barter system is a system where goods and services are exchanged directly for other goods and services. • In this system, double coincidence of wants is necessary to exchange goods and services.

– People’s wants must match at the same time. – To make an exchange, you must find someone who has the good or service you want and who also (at the same time) wants the good or service you offer.

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Functions of Money

• Medium of Exchange:

– Eliminates the trouble of finding a double coincidence of needs that existed under the barter system (reduces transaction costs) – Promotes specialization

• A medium of exchange must

– – – – – be easily standardized be widely accepted be divisible be easy to carry not deteriorate quickly

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Copyright © 2010 Pearson Addison-Wesley. All rights reserved.

Functions of Money

• Unit of Account:

– used to measure value in the economy – reduces transaction costs because it guarantees one price for each good or service.

• Store of Value:

– used to save purchasing power over time. – other assets also serve this function – Money is the most liquid of all assets but loses value during periods of inflation

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Evolution of the Payments...