Chapter 6 The Monetary System

LEARNING OBJECTIVES学习目标:

Understand the meaning of money and functions of central bank in an economy.

Explain how the banking system helps determine the supply of money

Analyze the tools the central bank uses to alter the supply of money

LECTURE VIDEO学习视频1:

1. The Meaning of Money

The existence of money makes trade easier. As money flows from person to person in the economy, it facilitates production and trade, allowing each person to specialize in what he or she does best and raising people's living standard.

Money refers to the set of assets in an economy that people regularly use to buy goods and services from other people.

Money serves three functions in our economy.

a. Definition of medium of exchange: an item that buyers give to sellers when they want to purchase goods and services.

When you buy a car at a car store, the store gives you the car and you give the store your money. the transfer of money from buyer to seller allows the transaction to take place.

b. Definition of unit of account: the yardstick people use to post prices and record debts.

You might observe that the goods in store are priced in terms of money, which help people quickly recognize how much they would pay for their purchase. 

Money as a unit of account can reduce the number of prices and lower the cost of trading.

c. Definition of store of value: an item that people can use to transfer purchasing power from the present to the future.

Money holds its value over time, so you don't have to spend it immediately upon receiving it. 

Not only the money, but also nonmonetary assets such as stocks and bonds people can hold transfer purchasing power from the present to the future。

The term wealth is used to refer to the total of all stores of value, including both money and nonmonetary assets, like stocks, bonds, real estate, cars, antiques, etc.

While, money and other assets differ in liquidity: the ease with which an asset can be converted into the economy's medium of exchange.

Money is the most liquid asset compared to other assets, but not perfect as a store of value. Because when prices rise, the inflation will ruin the value of money. 

In other words, when goods and services become more expensive, one dollar can buy less. 

Thus, When people decide in what forms to hold their wealth, they must balance the liquidity of each possible asset against the asset's usefulness as a store of value.

PRACTICE 习题1：