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What is Money?
Economies have evolved into the use of money because Money reduces transaction costs and time. The “double coincidence of wants” is too difficult to maintain over time.
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Functions of Money
•A medium of exchange
•Measure of value or unit of accounting
•Store of value
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Characteristics of Money
1. Durable = does not wear out quickly
2. Portable = is easily carried
3. Divisible = easily divided into smaller denominations
4. Scarce = limited
5. Uniformity = any two units of money are the same in terms of what they will buy
6. Acceptable = everyone must be able to use the money for transactions
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Types of Money
•Commodity Money = Money has value as a commodity, or good, aside from their value as money. Example: cattle for food and transportation; gems used for jewelry
•Representative Money = Money that is backed by some commodity, such as gold or silver.Example: Money can be exchanged or redeemed for gold or silver
•Fiat Money = Face value of money is mandated by the government, declared legal tender.
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The United States has “fiat” money = face value of money is mandated by the government, declared legal tender.
Fiat is Latin for “let it be done”
Our money is backed by trust, not gold or silver
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The Bureau of Engraving and Printing and part of the United States Treasury Department, prints all Federal Reserve Notes (U.S. currency) in six denominations –$1, $5, $10, $20, $50, and $100.
FYI: Before WWII there were $500, $1,000, $5,000 and $10,000 denominations.
The $2 bill can still be found in circulation and is legal tender.