The Factors That Determine the Value of Money

Money is a generally accepted medium of exchange in the form of bills and coins It is what consumers use to purchase goods and services, Not only does it consist of bills and coins, most of it is in the form of deposits That means people can spend their money by writing a check or using a credit or debit card, The value of our money depends on various factors. Without it, we would have to obtain goods and services through trade.

Money also serves as a good unit of account because it allows you to compare the value of goods and services, meaning it is an efficient way for sellers to price goods and services and buyers can determine whether the good is worth exchanging for money. The characteristics of money is important in order for it to be exchanged. For starters, the money must be durable. It must withstand physical wear and tear when it is being used over and over again.

An example would be a dollar that is used today, can be used weeks from now, or days, months, or years.

Money must also be portable. People need to be able to take money with them as they go about their daily lives. When you are out shopping, you just want to carry enough money to spend, and it should be easy to carry around, Not only should it be easy, but it must look uniformed. Whoever is receiving the money should be able to identify the bill or coin.

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Money should be the same size, same color, and same texture Money should also be divisible, meaning it can be divided into smaller units. If you were to exchange one dollar for four quarters, four quarters will still equal one dollar. Good money should be acceptable as well. Everyone in an economy must be able to accept it to exchange goods and services.

The final characteristic of good money is there is a limited supply, Limited supply means that there are restrictions on the amount of money that is in circulation and it ensures that the value remains consistent, Money gets its value from multiple sources. It depends on whether the money is commodity, representative, or fiat money Commodity money consists of objects that have value in and of themselves and that are also used as money. Examples of commodities that have been used as a medium of exchange are salt, cattle, and valuable stones, All of these objects have other uses as well, If it is not used as money, it can be preserved. For instance, the salt can be saved to preserve food The cattle can be used for meat, and the gems can be made into jewelry. Representative money puts objects that have value to use because the holder can exchange whatever items for something else that is also valuable. For instance, around the 17005, Maryland, North Carolina, and Virginia gave out tobacco notes which could have been converted to a certain amount of tobacco on demand.

Fiat money is money that has value because the government has said it is, and it is accepted to pay debts. The best example would be paper money. The production of money is tightly controlled and most of the time is controlled by the government, On a dollar bill, you will see the words, “This note is legal tender for all debts, public and private.” It basically means our money is valuable because the government says so. If our money supply is too little, the economy cannot grow, It would be difficult trying to start a business if there was $10,000 circulating in the entire American economy. If there is too much money however, money would not be so valuable and it will result in inflation, Therefore, economists carefully look over the money in circulation The Federal Reserve System has been the central bank since it was created in 1913.

The purpose of a central bank is to maintain the supply of money and credit of the economy. The board of governors plays a big role in the process. The board has seven members, each carrying a certain responsibility, It also includes 12 regional banks, each controlled by its own directors. One of the reasons this was created was to keep the banks in controlt Certain rules were put in place to tell banks what kind of loans they can make and how much money they need to keep on hand. The system also functions as a lender of last resort for member banks. If a bank were to run low on money, The Fed would step in and make a “loan,” and it can let people know that their money is safe. Today, The Fed still plays a vitally important role in our economy It controls the amount of money in circulation.

Also, the amount of money banks have to loan to people and businesses. The way they regulate is they use a form of a policy. It is called a monetary policy, which is a certain action to maintain the flow of money All banks have to keep a percentage of deposits on hand, and can keep more than the required reserve, but not any less. another action is a “discount rate,” which is when banks want to discourage one another from borrowing from each other, The Fed sets the discount rate high, also vice versa, It is important for us students to know this kind of things is to not only educate ourselves in how our economy works, but to our families as well, If this flow of money continues to rotate, it allows us to know how much money we have to spend.