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26.1 The Nature of Money - Coggle Diagram
26.1 The Nature of Money
What is Money?
Medium of exchange
anything widely accepted in a society in exchange for goods and services; makes specialization and division of labor possible; e.g. currencies
W/O MONEY, WE WOULD HAVE TO BE EXCHANGED BY BARTER – system in which goods and services are traded directly for other goods and services; e.g. barber needs sink repaired, finds plumber who wants haircut
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Characteristics
- generally acceptable, - high value relative to weight, - divisible/durable, - cannot counterfeit
Store of Value
goods may be sold today for money and money may then be stored until it is needed for some future purchase
Characteristics
- earning and spending not synchronized, - stable value (when P is stable), - method of deferred payments
Unit of Account
accounting function; is a means for comparing the values of goods and services; e.g. credit entries at a store
bank deposits acts as unit of account but also as medium of exchange b/c of transfer dollars credited to one's deposit account, so money from ATM becomes medium of exchange
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The Origins of Money
Metallic Money
many commodities have been used, but precious metals like gold and silver had great advantages; they were - recognizable, divisible, durable, stable value AND are of high intrinsic value
originally carried in bulk, and had to be weighed; ruler stamp coins, guaranteeing weight of face value; HOWEVER, clipping (shaving edge, keeping valuable metal to oneself) resulted in milling being present (coins having rough edge)
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Gresham's Law
"bad money drives out good"; when two types of money are used side by side, the one with the greater intrinsic value will be driven out of circulation
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Paper Money
to overcome problems with commodity of money; when depositing gold at goldsmith vault for safekeeping, used goldsmith receipt to receive gold on demand; eventually banks replacing goldsmiths with bank notes
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Fiat Money
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gold standard = a currency standard whereby a country's currency is convertible into gold at a fixed rate of exchange
is paper money or coinage that is neither backed by nor convertible into anything else but is decreed by gov. to be legal tender; NO INTRINSIC VALUE; DERIVES ITS VALUE FROM ITS ACCEPTIBILITY IN EXCHANGE
Legal tender = anything that by law must be accepted when offered either for the purchase of goods or services or to repay a debt
If its purchasing power remains stable = store of value; if both store of value and medium of exchange, then is unit of account
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