Moneythe Lubricant Of Exchange

If specialization permits people to concentrate on particular tasks, money then allows people to trade their specialized outputs for the vast array of goods and services produced by others. What is money? Money is the means of payment—the currency and checks that we use when we buy things. But more than that, money is a lubricant that facilitates exchange. When everyone trusts and accepts money as payment for goods and debts, trade is facilitated. Just imagine how complicated economic life would be if you had to barter goods for goods every time you wanted to buy a pizza or go to a concert. What services could you offer Sal's Pizza? And what about your educa-tion—what could you barter with your college for tuition that it needs? Because everyone accepts money as the medium of exchange, the need to match supplies and demands is enormously simplified.

Governments control the money supply through their central banks. But like other lubricants, money can get overheated and damage the economic en gine. It can grow out of control and cause a hyperinflation, in which prices increase very sharply. When that happens, people concentrate on spending their money quickly, before it loses its value, rather than investing it for the future. That's what happened to several Latin American countries in the 1980s, and many former socialist economies in the 1990s, when they had inflation rates exceeding 1000 percent or even 10,000 percent per year. Imagine getting your paycheck and having it lose 20 percent of its value by the end of the week!

Money is the medium of exchange. Proper management of the money supply is one of the major issues for government macroeconomic policy in all countries.

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