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Macroeconomics Test #3

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The Barter System+Problems

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Terms in this set (30)

The Barter System+Problems

Goods and services are traded directly. No money is exchanged.
Problems:
-Before trade can occur, each trader has to have something the other wants.
-Some goods can't be split (ex. If 1 goat is worth 5 chickens, what if you only want 1 chicken?)

Commodity Money

Something that performs the function of money (it is a medium of exchange) AND has valuable, alternative uses. (ex. Gold, silver etc...)

Fiat Money+Advantages

A medium of exchange that serves as money but has no other important uses. It derives all value from its status as money. (ex. Paper bills)
Advantages:
-Doesn't tie up any resources
-Can be managed based on the economy's needs, instead of by the amount of available resources to make the currency.

3 Functions of Money

1) A Medium of Exchange
-Can easily be used to buy goods+services w/o complications of barter system.
2) A Store of Value
-Allows you to store purchasing power for the future.
-Doesn't die or spoil.
3) A Unit of Account
-Measures the value of all goods+services. Acts as a measurement of value.

Financial System

Financial system is comprised of all financial institutions (banks), lenders, and borrowers within the economy.