Summary of chapter 26 of the book Economics. Written by N. Gregory Mankiw and Mark P. Taylor, 3rd edition. Written for IBMS students of Avans or for the course Economics. ISBN 9781408093795.
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Bedrijfseconomie / Finance & control
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Economics Chapter 26 The monetary system
In the economy of a long time ago, people would have to rely on barter.
Barter – the exchange of one good or service for another.
Double coincidence of wants – a situation in exchange where two people each have a good
or service that the other wants, and thus enter into an exchange.
This chapter:
- what is money?
- which various forms does money takes?
- how the banking system helps create money
- how the central banks controls the quantity of money in circulation
Meaning of money
Money – the set of assets in an economy that people regularly use to buy goods and services
from other people.
Money has 3 functions in the economy:
- A medium of exchange
- A unit of account
- A store of value
A medium of exchange – an item that buyers give to sellers when they want to purchase
goods or services.
A unit of account – the yardstick people use to post prices and record debts.
A store of value – an item that people can use to transfer purchasing power from the
present to the future.
Wealth – the total of all stores of value, including both money and non-monetary
assets.
Liquidity – the ease with which an asset can be converted into the economy’s medium of
exchange.
2 kinds of money:
- Commodity money
- Fiat money
Commodity money – money that takes the form of a commodity with intrinsic value.
Intrinsic value – means that the item would have value even if it were not used as money
(like gold).
Fiat money – money without intrinsic value that is used as money, because of government
decree.
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