Money, Banking and the central Banking system - the meaning of money - types of money

9 important questions on Money, Banking and the central Banking system - the meaning of money - types of money

What do we call a medium of exchange that is a good? What are 3 examples? And what defines its value?

we call it commodity money
like Gold, or Silver, or Salt
it has an Essential value

What do we mean when we say alternative uses gave commodity money more value independent of its role as a medium of exchange?

We mean that everyone values them and they can also make transactions with them alongside their original use

What was the paper money that consisted of notes issued by privately owned banks? And what did they promise?

Paper currency
they promised to exchange their notes for gold or silver coins on demand
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What do we call the medium of exchange that has NO essential value whose ultimate value was guaranteed by a Promise that it could always be converted into valuable goods on demand?

Commodity-backed money

What are the 2 advantages of commodity backed money over simple commodity money? How do we know this advantage works?

  • It tied up fewer valuable resources, so that the banks only need to keep some gold or silver on hand to satisfy the depositors, and could use the rest for investment in order to achieve gains from trade
  • they reduced the amount of real resources use by society to make transactions and provides the functions of money that is more convenient
  • Because in a normal day only a fraction on its paper notes are redeemed

What do we call the money whose value derives entirely from its official status as a means of exchange? Why is it trusted and accepted?

This is called fiat money
it is trusted because it is a government fiat or a policy declared by the government

What are the two advantages of fiat money

  • Creating fiat money does not use up any real resources beyond the paper it is printed on
  • the supply of money can be adjusted based on the needs of the economy, instead of being determined by the amount of gold and sliver available

What are the disadvantages of fiat money? What does that mean?

printing fake money

What is the risk associated with the government increasing money supply?

There is a large risk with allowing countries to print their own money, because they might feel like abusing the privilege

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