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MEASURE OF VALUE: The money function in which money is used as the common benchmark to designate the prices of goods throughout the economy. Measure of value, or unit of account, means money is functioning as the measuring unit for prices. In other words, prices of goods are stated in terms of the monetary unit. This is one of four basic functions of money. The other three are medium of exchange, store of value, and standard of deferred payment.

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Lesson 19: Money Creation | Unit 2: Fred Returns Page: 8 of 23

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The money creation mechanism is a profitable opportunity.
  • With 10% of his receipts redeemed at any given time Fred can issue up to 1,000 pounds of receipts.
  • 100 pounds for the original deposits plus another 900 pounds for loans.
Important points:
  • Fred has created money: Because his receipts are money, he can create money by making loans.
  • The new extra 900 pounds of money is used for investment that promotes economic growth.
A precarious balancing act:
  • If people redeem more than the 10% of the receipts, Fred is in trouble.
  • If so, the receipts become worthless, the money supply shrinks, and the local economy enters a recession.

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ASYMMETRIC INFORMATION

Information is not equally available to everyone. Asymmetric information results because efficient information search inevitably stops short of compete information. Some people obtain more benefits from information than others, are willing to incur higher search costs, and thus end up knowing more. Or they incur lower information search costs and have easier access to the information. In a market, sellers tend to have more information about the good than buyers. Asymmetric information gives rise to adverse selection, moral hazard, and the principal-agent problem. These problems can be lessened through signalling and screening.

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Paper money used by the Commonwealth of Massachusetts prior to the U.S. Revolutionary War, which was issued against the dictates of Britain, was designed by patriot and silversmith, Paul Revere.
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