Introduction to Finance

Digital currency
is 
electronic money that serves as a medium of exchange like physical money to make payments 
for goods and services. “Centralized” digital currency is backed by the creditworthiness of 
a government issuer along with a central bank that controls the supply of the currency. For 
example, electronic money in the U.S. is denominated in dollars backed by the creditwor-
thiness of the government with the Fed controlling the money supply. Electronic money in 
European and other developed countries also takes the form of centralized digital currency. In 
contrast, 
bitcoin
is a “decentralized” digital currency that was introduced in 2009 as an online 
payment system. The bitcoin system is not based on the creditworthiness of the issuer and 
there is no central control of the supply of bitcoins. The inability of governments to regulate 
and control the amount of bitcoins, and other similar decentralized digital currencies, is of 
concern to central banks and governments throughout the world.
currency exchange rate 
value of 
one currency relative to another
euro 
a single currency that has 
replaced the individual currencies 
of a group of European countries 
digital currency 
electronic 
money that serves as a medium of 
exchange for making payments
bitcoin 
decentralized digital 
currency without government 
credit-backing and no central 
control over the supply of bitcoins
Applying Finance To...
• Institutions and Markets 
The monetary system is composed of a 
central bank, the Federal Reserve System, and a banking system. In 
order for the monetary and fi nancial systems to work, money must 
be accepted as the medium of exchange by each of us. Commercial 
banks, in the aggregate, help create and transfer money and, thus, 
help the monetary system operate effi
ciently. Other fi nancial insti-
tutions also help in the savings-investment process, when indi-
vidual savings are pooled and lent or invested in business fi rms. 

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Summary