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Second Exam

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  • Money

    set of assets that people are generally willing to accept for goods and services

  • money eliminates the need for ...

    double coincidence of wants

  • barter economy

    economy where you trade goods for other goods

  • 2 problems with barter economies

    • no money

    • double coincidence of wants

  • functions of money

    1) medium of exchange

    2) Unit of Account

    3) Store or value

  • Medium of Exchange:

    item used for trading goods rather than for its consumption

    ex: U.S dollars, we do not consume them, only trade them.

  • Unit of Account:

    The measure we use to set prices and make calculations

    • allows for one set price

    • Ex: 1 piece of lumber is \$5

  • Store of value:

    ability to retain purchasing power over time

    • trade goods or services now, save money and use it for later for goods and services

  • Store of Value- Deferred Payments

    Allows for trading of goods in advance

    • allows for borrowing or lending

    • some assets hold wealth --> stocks, bonds, real estate, but it is not money

  • Liquidity

    how quickly an asset can be converted to cash

  • Kinds of money

    Fiat money and Commodity money

  • Fiat money

    Only has value because we say it has value (government issued currency)

    • ex: U.S dollars

  • Commodity money

    has value in other uses, but is also used as money

    • ex: gold --> used in jewelry, electronics