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The Role of Money in an Economy
Transcript of The Role of Money in an Economy
What is Money?
Anything that is generally acceptable as payment for goods and services
3 Functions of
1. A medium of exchange
People will accept anything as money as long as it performs the three functions for which it is designed:
Cash is the legal tender in Canada
2. A measure of value
Money allows us to compare the value of various goods in our economy
A unit of currency serves as a standard against which we can measure the value of a good or service and compare its value to other goods and services
3. A store of value
An instrument for storing purchasing power for the future
Liquidity is the ease with which an asset can be used to make a payment (Money is the most liquid of assets. Other assets are less liquid because although they have value, they must first be sold in order to obtain money)
The Characteristics of
In order for money to serve as a medium of exchange, it must above all be generally acceptable
Portable and easy to use
Be easily divided
Readily recognizable by colour and shape
Difficult to duplicate
Retain its value over time
Of the three functions of money, which one do you regard as most
The medium of exchange
Money must be accepted as a medium before it can serve as a measure and a store of value
Which of the three functions of money does a rise in
tend to undermine most severely?
The store of value
It is undermined most by inflation because money loses its buying power
Rank the following assets in terms of their liquidity:
a rare painting
shares in a large corporation
Canadian Savings Bond
Canada Savings Bond
Shares in a Large Corporation
No order to follow because they depend upon whether buyers can easily be found who will pay for them
Compare the characteristics of our currency in terms of its acceptability, with that of the USA. Do you think our currency meets the tests of acceptability, more or less satisfactory than the USA?