Macroeconomics
● Commoditymoney: Thisreferstoitemsusedas moneywhilealsohavinganintrinsicvaluein some other use . Gold is a form of commodity money and itwasusedforyearstodirectlybuy things, while also having other uses, such as making jewelry and dental fllings. Cigarettesare another form of commodity money used by prisoners of war who used topurchasegoodswith cigarettes, quote prices in terms ofcigarettes,andholdtheirwealthintheformofaccumulated cigarettes .However,theproblemwithcommoditymoneyisthat itsvaluecanchangewhenthe demand for it as an item falls . For example, if no one intheprisonsmoked,cigaretteswould have been useless. ● Fiatmoney: Bycontrast,fatmoney,alsoknownas tokenmoney ,isintrinsicallyworthless.The money used in the U.S. today (i.e., cash money) is mostly fat money, but what is the actual value of$1,$20,or$50bills?Zero.Howelsecanweusesmallgreenpiecesofpaper?Whydo people accept them? Because thegovernmentdeclaresitsmoneyas legaltender .Thatis,the governmentensuresthat thismoneyisacceptedbydeclaringitasanacceptablemediumof debt settlement . This is achieved through passing laws that defne certain pieces of paper, printed using certain ink and certain plates, as legal tender. Itisimportanttounderstandthat fatmoneyisnot backed by any commodity , such as gold or silver. That is another type of money referred to as commodity-backed money. Fiat money is the outcome of a measure taken by the government through the Fed (central bank). In addition, the supplyoffatmoneyhastobecontrolledwiselyto avoid risking its value in what is known as currency debasement . For instance, excessive printing/supply of money to fnance government expenditure makes money lose its value and leads to inflation (will be discussed later). ● Commodity-backedmoney: Thisis moneythathasnoinherentvaluebutcanbesecuredbya promise that it can be converted into something of value . For instance, the U.S. dollarwas backedbygolduntil1973.Anyformofcurrency,suchaspeanuts,thatcanbeexchangedforits equivalent value in a valuable commodity, such as silver, would be considered as commodity-backed money. Stocks and Bonds Financial assets other than cash and demand deposits, exist and earn a return. Under fnancial economics,whichthischapterisallabout,investmentreferstothepurchaseoffnancialassets,suchas stocks and bonds. A stock represents asliceofownershipinacompanyandpaysdividends (aportionofthecompany’s profts) to its owner. For instance, if individual A owns 10 sharesofacompanythathas1,000stocks, individualAowns1%ofthatcompany. Stocks,sometimesreferredtoasequity,areissuedbycompanies to exchangecashforownershipstakeinthecompany .Anotherwayforastockholdertomakeareturn
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