TAILIEUCHUNG - Ten Principles of Economics - Part 60

Ten Principles of Economics - Part 60. Economics is the study of how society manages its scarce resources. In most societies, resources are allocated not by a single central planner but through the combined actions of millions of households and firms. Economists therefore study how people make decisions: how much they work, what they buy, how much they save, and how they invest their savings. Economists also study how people interact with one another. | CHAPTER 27 THE MONETARY SYSTEM 611 Another example of commodity money is cigarettes. In prisoner-of-war camps during World War II prisoners traded goods and services with one another using cigarettes as the store of value unit of account and medium of exchange. Similarly as the Soviet Union was breaking up in the late 1980s cigarettes started replacing the ruble as the preferred currency in Moscow. In both cases even nonsmokers were happy to accept cigarettes in an exchange knowing that they could use the cigarettes to buy other goods and services. Money without intrinsic value is called fiat money. A fiat is simply an order or decree and fiat money is established as money by government decree. For example compare the paper dollars in your wallet printed by the . government and the paper dollars from a game of Monopoly printed by the Parker Brothers game company . Why can you use the first to pay your bill at a restaurant but not the second The answer is that the . government has decreed its dollars to be valid money. Each paper dollar in your wallet reads This note is legal tender for all debts public and private. Although the government is central to establishing and regulating a system of fiat money by prosecuting counterfeiters for example other factors are also required for the success of such a monetary system. To a large extent the acceptance of fiat money depends as much on expectations and social convention as on government decree. The Soviet government in the 1980s never abandoned the ruble as the official currency. Yet the people of Moscow preferred to accept cigarettes or even American dollars in exchange for goods and services because they were more confident that these alternative monies would be accepted by others in the future. MONEY IN THE . ECONOMY As we will see the quantity of money circulating in the economy called the money stock has a powerful influence on many economic variables. But before we consider why that is true we need to .

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