Unit 5 Microeconomics: Money and Finance Chapters 10.1 Economics Mr. Biggs

The Three Uses of Money Money - Anything that serves as a: Medium of exchange Unit of account Store of value Money

Money as a Medium of Exchange Medium of exchange - Anything that is used to determine value during the exchange of goods and services. Without money, people would have to barter. Barter - The direct exchange of one goods or services for another. Bartering is still used in some parts of the world, especially in traditional economies in Africa and Asia. Bartering is too time consuming and impractical to use in a modern economy.

Money as a Unit of Account Unit of account - A means for comparing the value of goods and services. For example, Cup of Noodles for $.79 vs. $2.79. Dollars, pesos, euros, yen, and dongs are all forms of units of account. Money as a Store of Value Store of value - Something that keeps its value if it is stored rather than used. For example, money can be saved for years to make a house down payment. When an economy experiences inflation, money does not function as well as a store of value.

The Six Characteristics of Money Currency - Coins and paper bills used as money. Many objects have been used as currency: Gold, shells, and animal teeth They all lacked at least one of the following six characteristics: Durability Portability Divisibility Uniformity Limited supply Acceptability Durability Objects used as money must withstand the physical wear and tear that comes with being used over and over again.

Portability People need to be able to take money with them as they go about their daily business. It must also be easily transferrable. Divisibility Money must be easily divided into smaller denominations. Uniformity Any two units of money must both have the same purchasing power. People must also be able to count and measure money accurately.

Limited Supply If an ounce of sand were a unit of money, it would have little value because sand is so plentiful. In the United States, the Federal Reserve controls the supply of currency in circulation. Acceptability Everyone in the economy must agree on the value of the money used. Sources of Money Value There are several possible sources of money’s value, depending on whether the money is commodity, representative, or fiat money.

Commodity Money Commodity money - Objects that have value in themselves and that are also used as money. For example, salt, cattle, and precious stones have all been used as money. Representative Money Representative money - Objects that have value because the holder can exchange them for something else. For example, paper certificates redeemable for an equal amount of gold or silver on request. Huge supplies of gold and silver must be stored to have representative money retain value.

Fiat Money Fiat money - Money that has value because the government has ordered that it is an acceptable means to pay debts. United States money today is “legal tender” or fiat money.

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