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.

Functions of Money

•A medium of exchange

•Measure of value or unit of accounting

•Store of value

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

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.

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

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.