Page 513 - Introduction to Business

CHAPTER 14 Understanding the Financial System, Money, and Banking 487

became a lending institution. When financial crises occur in emerging market
countries that are in the early stages of economic development, the IMF serves the
role of lender of last resort by making loans to reduce currency panics and assisting
troubled banks. It also steps in as a mediator between debtor countries experienc-
ing financial crises and creditor countries and banks worried about their invest-
ments in those countries.
The World Bank seeks to help the poorest countries improve their standard of
living. Some of their main missions are health (e.g., fight against the spread of
HIV/AIDS), educational quality and access, social development, poverty reduction,
environmental protection, private business formation, and economic reforms
leading to stability and future productivity. Together, the World Bank and the IMF
are the world’s largest sources of development and emergency assistance to poorer
countries.

reality What do you think are the five most important needs of developing
CH ECK countries to assist them in their future success?

Money and Banking

We use money everyday to make purchases of goods and services. Here we discuss
different kinds of money and how money has changed over time. Any government
can control the amount of total money in public hands through the establishment
of a central bank. An important aspect of central bank management of money sup-
plies is known as monetary policy, which attempts to use money to influence the
economic productivity of the country. Since money can affect peoples’ lives and
businesses’ success, money matters.

What Is Money?
Money takes many forms. Most people immediately think of coins and paper cur-
rency because they can purchase goods and services with them. Indeed, the most
basic characteristic of money is its use as a medium of exchange. Without money,
we would be forced to barter to make exchanges. For example, if we produced shoes
but wanted bread to eat, we would have to negotiate a trade of shoes for bread with
a baker. Money frees us of barter negotiations and enables us to easily make pay-
ments for goods or services. In making payments, we use money to assign the value
of each good and service that is produced; that is, money is a unit of account. unit of account The function of money
Another important characteristic of money is that it normally does not perish or to serve as means for valuing of goods
and services
deteriorate over reasonable periods of time. A loaf of bread must be exchanged
immediately or it would lose value due to spoiling. However, money is a store of store of value The function of money to
value that can be saved and used at a convenient time in the future. Lastly, money retain its value over time
can used to record the amount of interest and principal owed on debt. In this
respect money is a standard of deferred payment. standard of deferred payment The
function of money to be employed in
recording the amount of debt payments
LEARNING OBJECTIVE 4
Overview the history of money and why money matters to the economy.

Coins and Paper Money. The history of money is a fascinating subject
with close relationships to the economic and political power of countries.
Ancient money used by the Egyptians in 2500 B.C. was made of metal rings. The
Lydians are believed to be the first Western civilization to have minted coins in 700

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