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Money To build understanding of the concept ofmoney and its value, have students use two webgraphic organizers like the one shown at the right.Remind students that a web shows a main ideaand its supporting details. Suggest that in thecenter of one organizer, they put the label “Usesof Money” and that in the center of the other,they put the label “Characteristics of Money.”

Section Reading Support Transparencies A tem-plate and the answers for this graphic organizercan be found in Chapter 10, Section 1 of theSection Reading Support Transparency System.

Graphing the Main IdeaB U I L D I NGB U I L D I NG

K E Y CONCE PTSK E Y CONCE PTS

ChaptChapter er 1100 •• Section Section 11

Money

Objectives You may wish to callstudents’ attention to the objectivesin the Section Preview. The objec-tives are reflected in the main head-ings of the section.

Bellringer Ask students to thinkabout a favorite possession. Thenask them what they think the valueof that possession is and how theydetermine its value. Explain that inthis section they will learn how a sta-ble currency enables producers andconsumers to assign realistic, consis-tent values to goods and services.

Vocabulary Builder Have studentsfind the key terms in the section andread their definitions. Then havethem search magazines for imagesthat depict the meaning of each term.Encourage students to share theirfindings or to contribute to a classbulletin board.

SS uppose you have just arrived at yourneighborhood store after playing

basketball on a hot day. You grab a sodaand fish around in your jeans pockets forsome money. You find a pen, keys, and achewing gum wrapper, but, unfortunately,no money. Then you reach into your jacketpocket. Finally!—a crumpled dollar bill.You hand the money to the clerk and take along, cold drink.

Money is a part of our daily lives.Without it, we can’t get the things we needand want. That’s not the whole story ofmoney, however. In fact, money has func-tions and characteristics that you mightnever have thought about.

The Three Uses of Money If you were asked to define money, youwould probably think of the coins and billsin your wallet or the paychecks you receivefor your part-time job. Economists definemoney in terms of its three uses. For aneconomist, money is anything that serves asa medium of exchange, a unit of account,and a store of value.

Money as a Medium of Exchange A medium of exchange is anything that isused to determine value during theexchange of goods and services. Withoutmoney, people acquire goods and services

through barter, or the direct exchange ofone set of goods or services for another.Barter is still used in many parts of theworld, especially in traditional economiesin Asia, Africa, and Latin America. It isalso sometimes used informally in theUnited States. For example, a person mightagree to help paint a neighbor’s house inexchange for vegetables from the neigh-bor’s garden. In general, however, as aneconomy becomes more specialized,bartering becomes too difficult and time-consuming to be practical.

To appreciate how much easier moneymakes exchanges, suppose that money didnot exist, and that you wanted to tradeyour video cassette recorder (VCR) for anaudio CD player. You probably would havea great deal of trouble making theexchange. First, you would need to findsomeone who wanted to both sell themodel of CD player you want and buyyour particular VCR. Second, this personwould need to agree that your VCR isworth the same as his or her CD player. Asyou might guess, people in bartereconomies spend a great deal of time andeffort exchanging the goods they have forthe goods they need and want. That’s whybarter generally works well only in small,traditional economies.

Now consider how much easier yourtransaction would be if you used money as

money anything thatserves as a medium ofexchange, a unit ofaccount, and a store ofvalue

medium of exchangeanything that is used todetermine value duringthe exchange of goodsand services

barter the directexchange of one set ofgoods or services foranother

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ObjectivesAfter studying this section you will be able to:1. Describe the three uses of money.2. Explain the six characteristics of money.3. Understand the sources of money’s value.

Preview

Section FocusMoney serves as a medium ofexchange, a unit of account,and a store of value. Althoughmany objects have served asmoney in the past, the coinsand bills we use today meetthe needs of modern society.

Key Termsmoneymedium of

exchangebarterunit of

accountstore of

value

currencycommodity

moneyrepresentative

moneyfiat money

Lesson PlanTeaching the Main Concepts

1. Focus Throughout the world and in allof its forms, money has three essentialfunctions and six key characteristics thatcontribute to its utility as a medium ofexchange. Ask students to speculateabout these functions and characteristics.2. Instruct Begin by discussing thethree principal functions of money.Then move on to the six characteristicsof money, encouraging students to pro-vide examples to illustrate each one. Finally, explain each of the threesources of money’s value.3. Close/Reteach In contemporary society money has become the princi-pal medium of exchange, facilitatingthe orderly conduct of national andglobal commerce. Ask students to listways in which monetary transactionsare completed without the exchange ofany paper or coins.

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Supply and Demand To help students understandwhy money must be scarce to have any value,ask them to recall what they have learned aboutsupply, demand, and prices. When the quantitysupplied of a good or service is low and thequantity demanded is high, the good or service ismore valuable than it would be otherwise. The

same is true of money. If the supply were unlim-ited, its perceived value would fall, and eventu-ally consumers would need huge sums of moneyto pay for even small things, from a haircut to abag of groceries. By restricting the supply ofmoney, the Federal Reserve keeps its value stable.

Econ 101: Key Concepts Made EasyEcon 101: Key Concepts Made Easy$

Guided Reading and Review Unit 4 folder, p. 2 asks students toidentify the main ideas of the sectionand to define or identify key terms.

Transparency Resource Package Economics Concepts, 10A: The

Three Functions of Money

Meeting NCEE Standards Use the following benchmark activityfrom the Voluntary National ContentStandards in Economics to evaluatestudent understanding of Standard 11.

Select examples of money from acollection of pictures that show coins,currency, checks, savings accountpassbooks, ATM cards, and varioustypes of credit cards and explainwhether each is considered money.

You may wish to have students addthe following to their portfolios. Askthem to write a brief “day in the life”story about a group of friends andtheir money. As the group goesthrough the day, they repeatedly usemoney as a medium of exchange, aunit of account, and a store of value.The story should contain three exam-ples of each use of money. Encouragestudents to be creative in detailing theescapades of their characters. GT

Economics Assessment RubricEconomics Assessment Rubrics folder,pp. 6–7 provides sample evaluationmaterials for a writing assignment.

Learning Styles ActivityLearning Styles Lesson Plans folder, p. 25 asks student groups to evaluatethe six characteristics of money in acultural perspective.

Answer to . . . Building Key Concepts The illustra-tions illustrate money’s characteris-tics of portability, divisibility,acceptability, and durability.

a medium of exchange. All you would haveto do is find someone who is willing to payyou $100 for your VCR. Then you coulduse that money to buy a CD player fromsomeone else. The person selling you theCD player can use the $100 however he orshe wishes. By the same token, the personwho buys your VCR can raise that moneyhowever he or she wishes. Because moneymakes exchanges so much easier, peoplehave been using it for thousands of years.

Money as a Unit of Account In addition to serving as a medium ofexchange, money serves as a unit ofaccount. In other words, money provides ameans for comparing the values of goodsand services. For example, suppose yousee a jacket on sale for $30. You know thisis a good price because you have checkedthe price of the same or similar jackets inother stores. You can compare the cost ofthe jacket in this store with the cost inother stores because the price is expressedin the same way in every store in theUnited States—in terms of dollars andcents. Similarly, you would expect a moviein the theater to cost about $7.00, a videorental about $3.50, and so forth.

Other countries have their own forms ofmoney that serve as units of account. TheJapanese quote prices in terms of yen, theRussians in terms of rubles, Mexicans interms of nuevo pesos, and so forth.

Money as a Store of Value Money also serves as a store of value. Thismeans that money keeps its value if youdecide to hold on to—or store—it insteadof spending it. For example, when you sellyour VCR to purchase a CD player, youmight not have a chance to purchase a CDplayer right away. In the meantime, youcan keep the money in your wallet or in abank. The money will still be valuable andwill be recognized as a medium of ex-change weeks or months from now whenyou go to buy the CD player.

Money serves as a good store of valuewith one important exception. Sometimeseconomies experience a period of rapidinflation, or a general increase in prices.For example, suppose the United Statesexperiences 10 percent inflation during aparticular year. If you sold your VCR atthe beginning of that year for $100, themoney you received would have 10percent less value, or buying power, at the

unit of account ameans for comparingthe values of goods andservices

store of valuesomething that keepsits value if it is storedrather than used

Figure 10.1 The Three Functions of Money

Medium of Exchange Unit of Account Store of Value

Figure 10.1 The Three Functions of Money

Money serves as a medium of exchange, a unit of account, and a store of value.Money How does each illustration represent a characteristic of money?

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Answer to . . . Building Key Concepts It suggeststhat they served well, since theywere widely used.

BackgroundInterdisciplinaryInterdisciplinaryThe designs of U.S. paper currencyfeature many different illustrations.One of the most mysterious is theGreat Seal of the United States thatappears on the back of the one-dollar bill.

The face of the seal depicts abald eagle. Above the eagle’s headis a burst of light with 13 stars, rep-resenting the original 13 colonies.The eagle’s right talons hold an olivebranch with 13 leaves, representingpeace. The left talons clutch 13arrows, symbolizing war. The eagle’shead is turned toward the olivebranch to signal the nation’s desirefor peace. The shield on the eagle’sbreast includes 13 stripes. The mottoE Pluribus Unum means “out ofmany, one.”

The back of the seal shows an unfinished pyramid. The pyramidsymbolizes strength and endurance.The fact that it is unfinished indicatesthat the nation is striving for growthand perfection. Above the pyramid isa triangle with an eye in the center,both set in a burst of light. The eyesymbolizes divine guidance. Abovethe eye is another Latin motto,Annuit Coeptis, which means “Hehas favored our undertakings.” Atthe base of the pyramid is engravedthe date 1776 in Roman numerals.Below that appears still another Latinmotto, Novus Ordo Seclorum, whichmeans “a new order of the ages.”

Consider these suggestions to take advantage ofextended class time:

� Extend the Background note on this page byhaving students research and prepare reports onthe symbolism found in coins. Students may present their reports orally or use material fromthem in a bulletin board display. � Organize the class into groups of four to sixstudents, and have groups search the Web site of

the Bureau of Engraving and Printing for infor-mation on measures the government has taken tofoil counterfeiters. Then discuss how new tech-nologies continue to challenge the government’sattempts to safeguard currency. Have students usethe links provided in the Economics: Principles inAction segment of the Social Studies area at thefollowing Web site: www.phschool.com

Block Scheduling StrategiesBlock Scheduling Strategies

end of the year. This is because the priceof the CD player would have increased by10 percent during the year, to $110. The$100 you received at the beginning of theyear would no longer be enough to buy theCD player.

In short, when an economy experiencesinflation, money does not function as wellas a store of value. You will read moreabout the causes and effects of inflation inChapter 13.

The Six Characteristics of MoneyThe coins and paper bills used as moneyare called currency. In the past, societieshave also used an astoundingly wide rangeof other objects as currency. Cattle, salt,dried fish, furs, precious stones, gold, andsilver have all served as currency atvarious times in various places. So haveporpoise teeth, rice, wheat, shells, tulipbulbs, and olive oil. These items allworked well in the societies in which theywere used. None of them, however, wouldfunction very well in our economy today.Each lacks at least one of the six charac-teristics that economists use to judge howwell an item serves as currency. These sixcharacteristics are durability, portability,divisibility, uniformity, limited supply, andacceptability.

Durability Objects used as money must withstand thephysical wear and tear that comes withbeing used over and over again. If moneywears out or is easily destroyed, it cannotbe trusted to serve as a store of value.

Unlike wheat or olive oil, coins last formany years. In fact, some collectors haveancient Roman coins that are more than2,000 years old. While our paper moneymay not seem very durable, its rag (cloth)content helps $1 bills typically last at leasta year in circulation. When paper bills wearout, the United States government caneasily replace them.

Portability People need to be able to take money withthem as they go about their daily business.They also must be able to easily transfermoney from one person to another whenthey use money for purchases. Paper moneyand coins are very portable, or easilycarried, because they are small and light.

Divisibility To be useful, money must be easily dividedinto smaller denominations, or units ofvalue. When money is divisible, peopleonly have to use as much of it as neces-sary for any exchange. In the 16thand 17th centuries, people actuallyused pieces of coins to pay exactamounts for their purchases.Spanish coins called doubloonshad lines scored or etched on

currency coins andpaper bills used asmoney

NUMIDIAMAURITANIA SYRIAGREECE

EGYPTLIBYA

THRACEITALY

ASIAMINOR

DACIA

R U S S I A

SPAIN

GAUL

BRITAIN

G E R M A N Y

JUDEA

ARABIA

E U R O P E

A F R I C A

Roma

Burdigala

Toletum

Carthago

Athenae

Byzantium

Alexandria

Londinium

Gades

ATLANTICOCEAN

Black Sea

Medi terranean Sea

Nile

RiverRed

Sea

Crete

0

0 300 600 km

300 600 mi

N

S

W

E

Figure 10.2 Roman Empire, About Second Century A.D.Figure 10.2 Roman Empire, About Second Century A.D.

Coins used throughout the Roman Empire provide a goodexample of the six characteristics of money. They weredurable, portable, divisible into denominations, uniform, inlimited supply, and accepted throughout the Empire.Money What does the fact that Roman coins have beenfound in places as far from Rome as Britain and Egyptsuggest about how well the coins served as currency?

� Roman coins

Choose seven students to preparefor and participate in a skit aboutthe characteristics of money. Havesix students each bring an article toclass that does not fulfill a character-istic of useful money. A leaf from atree is a good example because it isnot durable. Each student shouldapproach the seventh student—the“merchant”— and try to buy some-thing with the money. The merchantshould explain why it is not accept-able. SN

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(Reteaching) Organize the class intogroups of four. Display the followinglist of items: sugar, emeralds, horses,coins, seashells, and government-issued currency. Ask students in eachgroup to evaluate each item withrespect to its usefulness as money. Tellstudents to consider the six character-istics of money as they make theirevaluations: durability, portability,divisibility, uniformity, scarcity, andacceptability. Have each group reportits evaluations to the rest of the class.

Ask students to research the history ofmoney throughout the world and toconstruct an illustrated time line show-ing major milestones in the develop-ment of modern currency. If studentsare familiar with authoring software,encourage them to create an interactivetime line that can be stored on a serveror posted at an Internet site for othersto use and enjoy. GT

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Have students read the section titled “The Six Characteristics of Money” and then answerthe question below.The Federal Reserve controls the supply of money that is in circulation. This results inthe following characteristic of money:

A acceptability

B scarcity

C uniformity

D divisibility

Preparing for Standardized TestsPreparing for Standardized Tests��

them so that they could be easily dividedinto eight parts. Spanish coins, in fact,came to be called “pieces of eight.”

Today, of course, if you use a $20 bill topay for a $5 lunch, the cashier will not ripyour bill into four pieces in order to makechange. That’s because American currency,like currencies around the world, consistsof various denominations—$5 bills, $10bills, and so on.

Uniformity Any two units of money must beuniform—that is, the same—in terms ofwhat they will buy. In other words, peoplemust be able to count and measure moneyaccurately.

Suppose everything were priced in termsof dried fish. One small dried fish mightbuy an apple. One large dried fish mightbuy a sandwich. This method of pricing isnot a very accurate way of establishing thestandard value of products because the sizeof a dried fish can vary. Picture the argu-ments people would have when trying toagree whether a fish was small or large. Adollar bill, however, always buys $1 worthof goods.

Limited SupplySuppose a society uses certain pebbles asmoney. These pebbles have only beenfound on one beach. One day, however,someone finds an enormous supply ofsimilar pebbles on a different beach. Nowanyone can scoop up these pebbles by thehandful. Since these pebbles are no longer

in limited supply, they are no longer usefulas currency.

In the United States, the Federal ReserveSystem controls the supply of money incirculation. By its actions, the FederalReserve is able to keep just the rightamount of money available. You’ll readmore about how the Federal Reservemonitors and adjusts the money supply inChapter 16.

Acceptability Finally, everyone in an economy must beable to exchange the objects that serve asmoney for goods and services. When yougo to the store, why does the person behindthe counter accept your money in exchangefor a carton of milk or a box of pencils?After all, money is just pieces of metal orpaper. Your money is accepted because theowner of the store can spend it elsewhere tobuy something he or she needs or wants.

In the United States, we expect that otherpeople in the country will continue toaccept paper money and coins in exchangefor our purchases. If people suddenly lostconfidence in our currency’s value, theywould no longer be willing to sell goodsand services in return for dollars. (SeeGlobal Connections below to learn moreabout what happens when people loseconfidence in their country’s currency.)

Sources of Money’s ValueThink about the bills and coins in yourpocket. They are durable and portable.They are also easily divisible, uniform, inlimited supply, and accepted throughoutthe country. As convenient and practical asthey may be, however, bills and coins havevery little value in and of themselves. What,then, makes money valuable? The answeris that there are actually several possiblesources of money’s value, depending onwhether the money is commodity, represen-tative, or fiat money.

Commodity Money A commodity is an object. Commodity moneyconsists of objects that have value in and of

commodity moneyobjects that have valuein themselves and thatare also used as money

The Ruble Russia’s currency is facing trouble as a store of value. In1998, it was devalued by the official Russian state bank from 6.3 rubles to thedollar to 9.5 rubles to the dollar. This slippage hurt average Russians, as theirsavings were now worth only two thirds of their previous value. ManyRussians turned to buying American dollars with the rubles they had left,fearing another devaluation and having more faith in the stability of the dollar.By 2003, the ruble was valued at 31 to the dollar, or about 3.2 cents.

Global Connections

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BackgroundCommon MisconceptionsCommon MisconceptionsFor centuries diamonds have beenaccorded almost mythic statusthroughout the world. In many west-ern cultures today it is the gift of adiamond that symbolizes the promiseof undying love, a promise reflectedin the advertising slogan, “A diamondis forever.”

This symbol of eternal love, how-ever, has its price. Diamonds areamong the world’s most expensivegems, and many people assume thatdiamonds are valuable because oftheir scarcity. It turns out, however,that diamonds are not as scarce assome people would like them to be. Infact, were it not for the vigilance ofDe Beers Consolidated Mines Ltd., diamonds might last just as long butnot be nearly as expensive.

De Beers is the South African diamond mining company that in1992 controlled approximately 80percent of the world’s diamondsales. De Beers leads a cartel, theCentral Selling Organization (CSO),that dictates the terms for diamondselling and pricing around the world.When some nations began to cir-cumvent the CSO and sell directly todealers during the 1990s, De Beersgrew concerned. If the supply of dia-monds were uncontrolled, theirvalue would plummet—especiallysince demand had been falling. Forthis reason, De Beers began buyingup the excess diamonds. In 1992 De Beers spent $350 million on dia-mond purchases from Angola alone.Diamonds are valuable because De Beers hoards the supply andreleases only as many diamonds asthe market can sell at a high price.

Wampum and Exchange Wampum is a NativeAmerican word for white and purple beads carvedfrom seashells. Making wampum was time-intensiveand required great skill. Wampum beads were about1⁄8 inch in diameter and 1⁄4 inch long. Each brittle beadhad a tiny hole drilled through the center, and thebeads were often strung or sewn onto fabric or ani-mal skins. Thousands of beads might be used tomake belts, which were exchanged as pledges.

Important events were often recorded in specialdesigns. The early Dutch and English settlers in NorthAmerica adopted the Native American wampum astheir initial currency. This use declined in the middle1600s, when metal coins became available.

Making the Connection Ask students to evaluatewampum according to the three uses and the sixcharacteristics of money.

Interdisciplinary Connections: HistoryInterdisciplinary Connections: History

Answer to . . . Building Key Concepts Fiat moneyis more convenient than commod-ity or representative money, and thegovernment can stabilize its valueby limiting its supply.

themselves and that are also used as money.For example, salt, cattle, and preciousstones have been used in various societiesas commodity money. These objects haveother uses as well. If not used as money,salt can preserve food and make it tastier.Cattle can be slaughtered for their meat,and gems can be made into jewelry.Tobacco, corn, and cotton all served ascommodity money in the Americancolonies.

As you can guess, commodity moneytends to lack several of the characteristicsthat make objects good sources of money.For example, it is often not portable,durable, or divisible. That’s whycommodity money only works in simpleeconomies. As the American colonies dev-eloped more complex economic systems,tobacco and other objects were no longeruniversally accepted as money. The coloniesneeded a more convenient payment system.They turned to representative money tomeet their needs.

Representative Money Representative money makes use of objectsthat have value because the holder canexchange them for something else of value.

For example, if your brother gives you anIOU, the piece of paper itself is worthnothing. The promise that he will do all ofyour chores for a month may be worthquite a lot, however. The piece of papersimply represents his promise to you.

Early representative money took theform of paper receipts for gold and silver.Gold or silver money was heavy and thusinconvenient for customers and merchantsto carry around. Each time someone madea transaction, the coins would have to beweighed and tested for purity. People there-fore started to leave their gold in gold-smiths’ safes. Customers would carrypaper ownership receipts from the gold-smith to show how much gold they owned.After a while merchants began to acceptgoldsmiths’ receipts instead of the golditself. In this way, the paper receiptsbecame an early form of paper money.

Colonists in the Massachusetts BayColony first used representative money inthe late 1600s when the Colony’s treasurerissued bills of credit to lenders to helpfinance King William’s War. The bills ofcredit showed the exact amount thatcolonists had loaned to the Massachusettsgovernment. Billholders could redeem the

representative moneyobjects that have valuebecause the holder canexchange them forsomething else of value

Figure 10.3 Sources of Money's ValueFigure 10.3 Sources of Money's Value

Americans used both commodity and representative money during the colonial period.Representative money was used until 1913, when the first Federal Reserve notes wereissued. Money What are the advantages of fiat money over commodity andrepresentative money?

Objects like this shock of wheat onceserved as commodity money.

Commodity money Representative money Fiat money

Representative money like this silvercertificate could be exchanged forsilver.

Today, Federal Reserve notes are fiatmoney, decreed by the federal govern-ment to be an acceptable way to paydebts.

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10. Students’ answers should demonstrate understand-ing of the concept of bartering. For example, studentsmay suggest that they might have trouble settling on aprice or that they might not have something of appro-priate value to offer in barter.

Guide to the EssentialsChapter 10, Section 1, p. 42 providessupport for students who need addi-tional review of the section content.Spanish support is available in theSpanish edition of the guide on p. 42.

Quiz Unit 4 folder, p. 3 includesquestions to check students’ under-standing of Section 1 content.

Presentation Pro CD-ROMQuiz provides multiple-choice

questions to check students’ under-standing of Section 1 content.

Answers to . . .

Section 1 AssessmentSection 1 Assessment1. Money serves as a store of value by

retaining worth even though goodsare not immediately purchased with it.

2. (a) corn, cattle, precious stones (b)bills of credit, IOUs (c) U.S. currency

3. The face value of U.S. currency isdecreed by the federal government.

4. Disadvantages of commodity moneyvary depending on the commodity butoften include lack of portability, dura-bility, or divisibility.

5. Continentals became worthlessbecause people came to believe thatthey would not be able to redeemthem for specie, since the federaltreasury held little gold or silver.

6. Students may say that they can shoparound for the best bargain, knowingthat their money will retain its value.

7. Neither would make good money.Movie tickets lack divisibility, uniform-ity, scarcity, and acceptability.Popcorn lacks durability, divisibility,uniformity, scarcity, and acceptability.

8. Selling the hockey stick for money isthe best solution because the moneyfunctions as an accepted medium ofexchange. It might be difficult to findsomeone who wants to exchange acalculator for a hockey stick, but it isrelatively simple to sell a hockey stickand to buy a calculator.

9. Student proposals should meet the sixcharacteristics of money. They shouldchoose a durable metal, for example,but not one that is too plentiful.

GTE

paper for specie, that is, goldand silver coins.

Representative money wasnot without its problems.During the American Rev-olution, the Second Con-tinental Congress issuedrepresentative money calledContinentals to finance thewar against England. Unfor-tunately, few people wereable to redeem these earlypaper currencies for speciebecause the federal govern-

ment had no power to collect taxes. Untilthe Constitution replaced the Articles ofConfederation in 1789, the federal govern-ment depended on the states’ voluntarycontributions to fill the treasury. As aresult, the federal treasury held very littlegold or silver. Continentals became worth-less because people came to believe thatthey would not be able to redeem theirbills for gold and silver coins. People evenbegan to use the phrase “not worth aContinental” to refer to something useless.

Later, the United States governmentissued representative money in the form ofsilver and gold certificates. These certificates

were “backed” by gold or silver. In otherwords, holders of such certificates couldredeem them for gold or silver at a localbank. The United States government thushad to keep vast supplies of gold and silveron hand to be able to convert all paperdollars to gold if the demand arose. Somesilver certificates circulated until 1971, butfor the most part, the government stoppedconverting paper money into silver or goldin the 1930s.

Fiat Money If you examine a dollar bill, you will seeGeorge Washington’s picture on one side,and on the other side the words, “This noteis legal tender for all debts, public andprivate.” In essence, these words mean thatour money is valuable because our govern-ment says it is.

United States money today is fiat money.A fiat is an order or decree. Fiat money, alsocalled “legal tender,” has value because thegovernment has decreed that it is an accept-able means to pay debts. It remains inlimited supply, and therefore valuable,because the Federal Reserve controls itssupply. This control of the money supply isessential for a fiat system to work.

fiat money money thathas value because thegovernment hasordered that it is anacceptable means topay debts

Section 1 Assessment

Key Terms and Main Ideas1. How does money serve as a store of value?2. Give examples of (a) commodity money, (b) representa-

tive money, and (c) fiat money.3. Why does United States currency have value? 4. What are the disadvantages of commodity money?5. Why did Continentals become worthless?

Applying Economic Concepts6. Critical Thinking Suppose you are shopping for a new

backpack and want to get the best value for your money.Explain how the fact that money functions as a unit ofaccount helps you to make your choice.

7. Try This Would movie tickets or popcorn make goodmoney? Describe how well these items meet each ofthe six characteristics of an ideal currency.

8. Decision Making Suppose you need a graphing calculator. Should you plan to trade your hockey stickfor one or should you try to sell your hockey stick anduse the money to buy one from a classmate? Explainyour reasoning.

9. Problem Solving What material(s) would you use if youwere creating a new United States coin? Why?

10. Critical Thinking Suppose you live in a society that hasa barter economy. What difficulties might youencounter in paying for such services as medical careand education?

Some government agencies estimate that only about one third of all existing pennies are in circulation. The rest sit in jars, fountains, desk drawers, and pockets. Many merchants would prefer to do away with pennies altogether and round up prices to the nearest nickel. While pennies seem insignificant, however, rounding up to the nearest nickel could cost American consumers approximately $600 million per year.

FAST FACT

PHSchool.com

For: Internet ActivityVisit: PHSchool.comWeb Code: mnd-4101

Progress Monitoring OnlineFor: Self-quiz with vocabulary practiceWeb Code: mna-4105

Typing in the Web Codewhen prompted will bring students directlyto detailed instructions for this activity.

Progress Monitoring OnlineFor additional assessment, have students accessProgress Monitoring Online at Web Code: mna-4105