Introduction to Basics of Economics
Money is a key component of any economy. It serves as a medium of exchange, a unit of account, and a store of value.
First, let's discuss the functions of money. Money serves three key functions - medium of exchange, unit of account, and store of value. The medium of exchange function means that money is used to buy and sell goods and services. The unit of account function means that money is used to measure the value of goods and services. Finally, the store of value function means that money can be saved and used in the future.
Next, let's discuss the types of money. There are three types of money - commodity money, fiat money, and digital money. Commodity money is money that has intrinsic value, such as gold or silver. Fiat money is money that has no intrinsic value and is declared legal tender by the government, such as the US dollar. Digital money, such as Bitcoin, is a new form of money that is created and stored electronically.
Now, let's move on to banking. Banks are financial institutions that accept deposits from customers and use those deposits to make loans. Banks make money by charging interest on loans and paying interest on deposits. Banks also play a crucial role in the money supply of the economy. When banks make loans, they create new money. This process is known as fractional reserve banking.
Finally, let's discuss the role of the central bank. The central bank is responsible for regulating the money supply and controlling inflation. In the United States, the central bank is the Federal Reserve. The Federal Reserve uses a variety of tools to control the money supply, including open market operations, reserve requirements, and the discount rate.
Understanding the basics of money and banking is crucial for understanding how the economy works. In the next lesson, we will discuss monetary policy and its effects on the economy.
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