MONEY Define Money MONEY Coins and Bills Economists

MONEY

• Define Money? MONEY • Coins and Bills? • Economists define money in terms of its three uses • 1) Medium of Exchange • 2) Unit of Account • 3) Store of Value

Medium of Exchange • Anything that is used to determine value • • during the exchange of goods and services How would people acquire goods w/o money? Barter – Exchange of one set of goods or services for another Used today? Money makes exchanges much easier

Unit of Account • A means for comparing the values of goods and services • Comparing cost • How much does a movie ticket cost? • How much does an ipod cost?

Store of Value • Money keeps its value if you decide to hold on to it (store it) • One Exception: Inflation (Increase in Prices)

Six Characteristics of Money • Coins and Paper Bills used as money: Currency • Past societies have used cattle, salt, gold, silver, wheat, etc. • Not work very well today • Each lacks at least one characteristic

CHARACTERISTICS • 1) Durability o Withstand physical wear & tear o If money wears out it cannot serve as a store of value o Coins last for many years (made from copper/nickel) o Paper money – Cloth content helps $1 bills last at least one year (18 months in circulation on average) $100 – 9 years on average o 25% Cotton; 75% Linen o 51% Rule

Characteristics • 2) Portability o. Able to take money with you o. Easily transfer money from one person to another o. Coins and paper money are very portable

Characteristics • 3) Divisibility o. To be useful money must be easily divided into smaller denominations o. Only have to use as much of it as necessary o 1500 -1600’s: People actually used pieces of coins

Characteristics • 4) Uniformity o. Units of money must be the same – in terms of what they will buy o. Must be able to count and measure money accurately o$1 – Buys you $1 worth of goods

Characteristics • 5) Limited Supply • Federal Reserve System controls the supply of money in circulation • Set Reserve Requirements for local banks

Characteristics • 6) Acceptability • Why do people accept money? • Confidence in our money

Value • Bills and Coins in your pocket are: o. Durable o. Portable o. Easily Divisible o. Uniform o. In Limited Supply o. Accepted throughout the country • What makes it Valuable? • Depends what “type” of money you have

Money • Commodity Money • Representative Money • Fiat Money

Commodity Money • Objects that have value (and can be used as money) • Salt – If not used as money…. . • Cattle – If not used as money…. • Lacks characteristics • Works only in simple economies

Representative Money • Objects that have value because the holder can exchange them for something else of value • Early form of money was gold/silver • Instead of carrying gold/silver • Bank note (certificate) that could be exchange for silver or gold

Fiat Money • “Our money is valuable because………. • Our government says it is!” • “This note is legal tender for all debts, public and private”