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Copyright ? 2010 Pearson Addison-Wesley. All rights reserved. 3-* Copyright ? 2010 Pearson Addison-Wesley. All rights reserved. Chapter 3 What Is Money? Meaning of Money What is Money? Money (or the “money supply”): anything that is generally accepted 1) in payment for goods or services or 2) in the repayment of debts. A rather broad definition 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) Functions of Money Medium of Exchange: Eliminates the trouble of finding a double coincidence of needs (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 Functions of Money Unit of Account: used to measure value in the economy reduces transaction costs Why is this important? What about a barter economy? 3 goods = 3 prices 10 goods = 45 prices 100 goods = 4950 prices 1000 goods = 499,500 prices With Money: 1000 goods = 1000 prices! Functions of Money Store of Value: used to save purchasing power over time. other assets also serve this function (bonds, stock, houses, art, etc.) Why Hold Money for this purpose? Money is the most liquid of all assets. - Is Money a Good Store of Value? Depends on inflation (loses value during inflation). Evolution of the Payments System Commodity Money: valuable, easily standardized and divisible commodities (e.g. precious metals, cigarettes). Fiat Money: paper money decreed by governments as legal tender. Evolution of the Payments System Checks: an instruction to your bank to transfer money from your account Electronic Payment (e.g. online bill pay). E-Money (electronic money): Debit card Stored-value card (smart card) E-cash ? Are We Mo