Macroeconomics

‭farmer‬‭might‬‭exchange‬‭10‬‭oranges‬‭for‬‭fve‬‭pencils.‬ ‭This‬‭system‬‭served‬‭as‬‭an‬‭alternative‬‭to‬‭the‬‭monetary‬ ‭economy‬ ‭we‬ ‭have‬ ‭today.‬ ‭However,‬ ‭it‬ ‭had‬ ‭limitations‬ ‭that‬ ‭ultimately‬ ‭led‬‭to‬‭the‬‭creation‬‭of‬‭money.‬‭The‬ ‭main‬‭limitation‬‭to‬‭barter‬‭is‬‭the‬‭need‬‭for‬‭a‬ ‭double‬‭coincidence‬‭of‬‭wants‬ ‭:‬‭In‬‭a‬‭barter‬‭trade,‬‭both‬‭parties‬ ‭need‬‭to‬‭have‬‭what‬‭the‬‭other‬‭wants,‬‭and‬‭both‬‭must‬‭desire‬‭what‬‭the‬‭other‬‭has.‬‭In‬‭complex‬‭societies‬‭with‬‭a‬ ‭wide‬‭variety‬‭of‬‭goods‬‭and‬‭services,‬‭barter‬‭exchanges‬‭become‬‭almost‬‭impossible‬‭due‬‭to‬‭the‬‭substantial‬ ‭effort‬ ‭required‬ ‭to‬ ‭fnd‬ ‭a‬ ‭perfect‬ ‭match.‬ ‭Consider‬ ‭the‬ ‭challenge‬ ‭of‬ ‭trading‬ ‭3‬ ‭red‬ ‭shirts‬ ‭and‬ ‭a‬ ‭coffee‬ ‭machine‬‭for‬‭a‬‭chicken‬‭and‬‭a‬‭plant.‬‭The‬‭odds‬‭of‬‭fnding‬‭someone‬‭who‬‭not‬‭only‬‭has‬‭a‬‭chicken‬‭and‬‭a‬‭plant‬ ‭but also wants exactly 3 red shirts and a coffee machine are extremely low!‬ ‭As‬‭societies‬‭became‬‭more‬‭complex‬‭and‬‭economies‬‭grew,‬‭people‬‭understood‬‭the‬‭need‬‭for‬‭a‬‭medium‬‭of‬ ‭exchange‬ ‭that‬ ‭eliminates‬ ‭the‬ ‭problem‬ ‭of‬ ‭the‬ ‭double‬ ‭coincidence‬ ‭of‬ ‭wants.‬ ‭This‬ ‭medium‬ ‭of‬ ‭exchange‬ ‭evolved‬ ‭throughout‬ ‭history,‬ ‭from‬ ‭beads‬ ‭to‬ ‭crops,‬ ‭stones,‬ ‭animals,‬ ‭and‬ ‭even‬ ‭tobacco,‬ ‭until‬ ‭humans‬ ‭adopted today’s monetary system that relies on the use of various fnancial assets.‬ ‭Money‬ ‭is‬ ‭not‬ ‭only‬ ‭about‬ ‭coins‬ ‭and‬ ‭bills.‬ ‭It‬ ‭refers‬ ‭to‬ ‭any‬ ‭asset‬ ‭that‬ ‭can‬ ‭serve‬ ‭the‬ ‭three‬ ‭following‬ ‭functions‬ ‭:‬

‭1.‬ ‭Medium‬ ‭of‬ ‭Exchange:‬ ‭The‬ ‭primary‬ ‭function‬ ‭of‬ ‭money‬ ‭is‬ ‭its‬ ‭ability‬ ‭to‬ ‭be‬ ‭used‬ ‭to‬ ‭buy‬ ‭something‬ ‭else.‬ ‭For‬ ‭instance,‬ ‭one‬ ‭can use a $100 bill to buy a concert ticket.‬ ‭2.‬ ‭Store‬ ‭of‬ ‭Value:‬ ‭Another‬ ‭function‬ ‭of‬ ‭money‬ ‭is‬ ‭transporting‬ ‭purchasing‬‭power‬‭from‬‭one‬‭time‬‭period‬‭to‬‭another,‬‭allowing‬ ‭it‬ ‭to‬ ‭become‬‭a‬‭medium‬‭of‬‭exchange‬‭later‬ ‭.‬‭In‬‭other‬‭words,‬‭it‬ ‭should‬‭allow‬‭its‬‭holders‬‭to‬‭save‬‭for‬‭later.‬ ‭For‬‭instance,‬‭one‬‭may‬ ‭decide‬ ‭to‬ ‭save‬ ‭the‬ ‭$100‬ ‭in‬ ‭a‬ ‭safe‬ ‭to‬‭buy‬‭a‬‭concert‬‭ticket‬‭next‬ ‭year.‬

‭People‬‭can‬‭store‬‭money‬‭and‬‭accumulate‬‭wealth‬‭in‬‭various‬‭forms,‬‭such‬‭as‬‭gold,‬‭real‬‭estate,‬‭and‬ ‭other‬‭assets.‬‭However,‬‭a‬‭fnancial‬‭asset‬‭has‬‭an‬‭advantage‬‭over‬‭other‬‭forms‬‭of‬‭money‬‭when‬‭it‬‭is‬ ‭more‬ ‭liquid‬ ‭.‬ ‭Liquidity‬ ‭refers‬ ‭to‬ ‭the‬ ‭ease‬ ‭with‬ ‭which‬ ‭an‬ ‭asset‬ ‭can‬ ‭be‬ ‭converted‬ ‭into‬ ‭cash‬ ‭without‬ ‭losing‬ ‭purchasing‬ ‭power‬ ‭.‬ ‭Cash‬ ‭and‬ ‭demand‬ ‭deposits‬ ‭are‬ ‭the‬ ‭most‬ ‭liquid‬ ‭form‬ ‭of‬ ‭money.‬ ‭Cash‬ ‭can‬ ‭be‬ ‭used‬ ‭immediately‬ ‭,‬ ‭and‬ ‭demand‬ ‭deposits‬ ‭,‬ ‭also‬ ‭referred‬ ‭to‬ ‭as‬ ‭bank‬ ‭deposits,‬‭refer‬‭to‬ ‭money‬‭kept‬‭in‬‭a‬‭bank,‬ ‭like‬‭checking‬‭accounts.‬‭Banks‬‭are‬‭usually‬‭required‬‭to‬ ‭provide access to this money‬ ‭immediately on demand‬ ‭;‬‭therefore, they are highly liquid too.‬ ‭3.‬ ‭Unit‬ ‭of‬ ‭account‬ ‭(also‬ ‭known‬ ‭as‬ ‭a‬ ‭measure‬ ‭of‬ ‭value):‬ ‭Money‬ ‭should‬ ‭enable‬ ‭comparisons‬ ‭between‬ ‭the‬ ‭value‬ ‭of‬ ‭different‬ ‭items‬ ‭that‬ ‭are‬ ‭expressed‬ ‭in‬ ‭money‬ ‭terms‬ ‭.‬ ‭For‬ ‭instance,‬ ‭a‬ ‭concert ticket that sells for $100 is said to be worth 10 times as much as a book that sells for $10.‬ ‭Types of Money‬ ‭The‬ ‭forms‬ ‭of‬ ‭money‬ ‭used‬ ‭throughout‬ ‭history‬ ‭varied‬ ‭across‬ ‭time‬ ‭periods‬ ‭and‬ ‭cultures;‬ ‭however,‬ ‭economists usually classify the types of money under three main categories:‬

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