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Money is defined as something which serves as a means of exchange, a store of value, and a unit of account and represents only an extremely small fraction of the real wealth of any given society or country where it is used. The currency which serves as money may be backed by some tangible commodity, such as the gold standard, or may be fiat money, such as Federal Reserve notes. Alternatively, trade may be carried on using commodity pay, wherein existing commodities are assigned exchange values but not explicitly designated as money.

The Development of Money

The earliest discovered forms of money were easily carried items with some inherent value, such as salt (used in ancient Rome) and fishhooks (used by American Indians). This replaced or supplemented pre-existing barter systems. Precious metals, such as copper, gold, and silver, have made good coins, being both easily transportable and having inherent value. In 1933, the United States abandoned the gold standard,[1] switching over to fiat currency, which has no inherent value beyond the government's assurance that it has value.

Money Neutrality and the Money Market

Money may be viewed as neutral or non-neutral regarding the real economy; it is disputed whether changes in the money market cause changes in real markets. The money market itself consists of a money supply (typically fixed for any given period) and a demand function for money. Because the quantity of money is typically exogenously given, the only variable determined in the money market is the price of money.

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