MONEY1 BANKING AND THE FINANCIAL SYSTEM

Apuntes

MONEY, BANKING AND THE FINANCIAL SYSTEM Chapter 2: Money and the Payments System Barter means trading goods for goods — “I give you apples, you give me shoes.” It doesn’t work well because: • It needs a double coincidence of wants — both people must want what the other oAers at the same time. • It’s hard to compare prices (How many chickens equal one cow?) • It’s slow and inconvenient — lots of searching and negotiating. The Four Functions of Money 1. Medium of exchange – It’s what you use to buy things. Example: You pay for coAee with euros; the shop accepts them immediately. 2. Unit of account – A common measure of value to compare prices. Example: Everything is listed in euros, so you can compare easily (pizza €10, book €20). 3. Store of value – Keeps its purchasing power over time (but inflation reduces it). Example: If inflation is high, €100 today buys less next year. 4. Standard of deferred payment – Useful for loans or contracts that involve future payments. Example: A one-year loan in euros. In high inflation, money still works as a medium of exchange but fails as a store of value. Money vs. Income vs. Wealth Concept Meaning Example Money What you can spend right ...