week 1 Flashcards
(20 cards)
What is the relationship between the development of money and central banks?
The development of money is linked to the development of central banks.
What is unique about money compared to other commodities?
Money is unique; it is not a commodity.
What is the yield curve?
The yield curve is the relationship between interest rates and yields.
What are the key properties of any money?
- Medium of exchange for buying things
- Unit of account for pricing
- Store of value for saving
What are the three types of money?
- Commodity money
- Representative money
- Fiat money
What is commodity money?
Commodity money has value even when it is not used as money, derived from the commodity it is made from.
What characterizes representative money?
Representative money has little to no value of its own but can be exchanged for an underlying commodity.
What is fiat money?
Fiat money is government-issued currency not backed by a commodity.
What historical transition occurred in Britain in 1931?
Britain left the gold standard and transitioned to fiat money.
What was one significant effect of introducing paper money?
The introduction of paper money raised the rate of economic growth and changed commerce and government finance.
What did the introduction of paper money reduce?
Paper money reduced transaction costs compared to commodity money.
What is a financial asset?
A financial asset is a claim on another agent (person, firm, bank, gov.).
What is a financial liability?
A financial liability is a debt; one person’s financial asset is another person’s debt.
True or False: Fiat money is a scam.
False; fiat money is a useful social institution.
What backs modern fiat money?
Modern fiat money is created by the central bank and backed by the state.
What is legal tender?
Legal tender is currency that can be used to settle or clear a debt in court.
What is the significance of trust in the fiat money system?
Trust holds up the fiat money system, as modern currency is divorced from any real value apart from the value we give it.
advantages/diadvanttages of commodity money
advantages:
- involves use of non-financial assets as money (gold, cows, cowries)
- confidence in continued ability to exchange (trade) due to commodity having value in its own
disadvantages: include fluctuating quantities which can cause hyperinflation, opportunity cost of using it for something with an alternative function as money - jewellery
advantages / disadvantages of fiat money
advantages:
* Solution to coordination/trust problem with IOUs
* Backed by the state, since the central bank is fiscally backed by the state
* Legal tender (is a form of money that the courts of law are required to recog nize
* Socially accepted
* Enables closer monetary policy control because supply can be controlled relative to demand iunlike in commodity or representative
*trusted and accepted => no devalue via inflation
disadvantages:
it is entirely based on social institutional belief in money
- it is not directly backed by anything
Is fiat money a scam?
- rather than viewing it as a scam, it can be referred to as instiutional belief
- technically it is very hard for all people to suddenly lose faith in the currency, so it is widely socially accepted
- while it isn’t really backed by anything physical direclty, it is issued by the central bank which itself is fiscally backed by the state
- it is trusted and accepted by everyone
