Money is often defined in terms of the three functions or services that it provides. Money serves as a medium of exchange, as a store of value, and as a unit of account. Medium of exchange. Money's most important function is as a medium of exchange to facilitate transactions. Without money, all transactions would have to be conducted by barter, which involves direct exchange of one good or service for another. The difficulty with a barter system is that in order to obtain a particular good or service from a supplier, one has to possess a good or service of equal value, which the supplier also desires. In other words, in a barter system, exchange can take place only if there is a double coincidence of wants between two transacting parties. The likelihood of a double coincidence of wants, however, is small and makes the exchange of goods and services rather difficult. Money effectively eliminates the double coincidence of wants problem by serving as a medium of exchange that is accepted in all transactions, by all parties, regardless of whether they desire each others' goods and services.
Store of value. In order to be a medium of exchange, money must hold its value over time; that is, it must be a store of value. If money could not be stored for some period of time and still remain valuable in exchange, it would not solve the double coincidence of wants problem and therefore would not be adopted as a medium of exchange. As a store of value, money is not unique; many other stores of value exist, such as land, works of art, and even baseball cards and stamps. Money may not even be the best store of value because it depreciates with inflation. However, money is more liquid than most other stores of value because as a medium of exchange, it is readily accepted everywhere. Furthermore, money is an easily transported store of value that is available in a number of convenient denominations.
Unit of account. Money also functions as a unit of account, providing a common measure of the value of goods and services being exchanged. Knowing the value or price of a good, in terms of money, enables both the supplier and the purchaser of the good to make decisions about how much of the good to supply and how much of the good to purchase.
FAQs
To summarize, money has taken many forms through the ages, but money consistently has three functions: store of value, unit of account, and medium of exchange. Modern economies use fiat money-money that is neither a commodity nor represented or "backed" by a commodity.
What are the 4 functions of money? ›
The Four Basic Functions of Money
Money serves four basic functions: it is a unit of account, it's a store of value, it is a medium of exchange and finally, it is a standard of deferred payment.
What are the 3 basic functions of money? ›
Money functions as a medium of exchange, allowing individuals to trade goods and services with one another. It also serves as a store of value, allowing people to save wealth over time. Lastly, it functions as a unit of value, enabling people to compare the worth of different items.
What are the three functions of money quizlet? ›
Money has three functions: as a store of value, as a unite of account and as a medium of exchange.
What are the 4 types of money? ›
Different 4 types of money
- Fiat money – the notes and coins backed by a government.
- Commodity money – a good that has an agreed value.
- Fiduciary money – money that takes its value from a trust or promise of payment.
- Commercial bank money – credit and loans used in the banking system.
In order for money to function well as a medium of exchange, store of value, or unit of account, it must possess six characteristics: divisi- ble, portable, acceptable, scarce, durable, and stable in value.
What are the four functions served by money quizlet? ›
The four functions are medium of exchange, unit of account, store of value, and standard of deferred payment. In the long run, something will not serve as money if it does not fulfill all four functions.
What is the most basic function of money? ›
Money's most important function is as a medium of exchange to facilitate transactions. Without money, all transactions would have to be conducted by barter, which involves direct exchange of one good or service for another.
What gives money value? ›
The value of a currency, like any other asset, is determined by supply and demand. An increase in demand for a particular currency will increase the value of the currency, while an increase in supply will decrease the currency's value. The exchange rate is the value of one country's currency in relation to another.
Which is not the function of money? ›
Answer and Explanation:
The price mechanism is not a function of money. It is a system for setting the prices of goods and services through the interactions between sellers and buyers. Money has three main functions, and these include store of value, medium of exchange, and unit of account.
Economists differentiate among three different types of money: commodity money, fiat money, and bank money. Commodity money is a good whose value serves as the value of money. Gold coins are an example of commodity money. In most countries, commodity money has been replaced with fiat money.
What are the functions of money answer key? ›
The three functions of money are: Medium of exchange: use item to buy goods and services. Store of value: use item to transfer purchasing power to the future. Unit of account: use item to denote prices and debts.
What are two types of money? ›
The Four Types of Money
- Commodity Money. Commodity money is any physical object that has value in and of itself and can be used as money. ...
- Fiat Money. Fiat money is currency that has value only because of government regulation of law. ...
- Fiduciary Money. ...
- Commercial Bank Money.
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- Step 1: Know Your Numbers. Comparing your income to monthly payments will help you budget for savings. ...
- Step 2: Protect What's Yours. Insurance is the best defense against the unexpected. ...
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Credit money is the creation of monetary value through the establishment of future claims, obligations, or debts. These claims or debts can be transferred to other parties in exchange for the value embodied in these claims.
What is the high power money? ›
High-powered money is the sum of commercial bank reserves and currency (notes and coins) held by the Public. High-powered money is the base for the expansion of Bank deposits and creation of money supply. The supply of money varies directly with changes in the monetary.
What are the 4 functions of money tutor2u? ›
Money – in its various forms – fulfils various key functions including a medium of exchange, a unit of account, a store of value and a standard of deferred payment.
What are the primary and secondary functions of money? ›
There are three main functions of money: 1. Primary function i.e money is used as a medium of exchange and it is the measure of value. 2. The secondary function of money i.e. It is the standard of deferred payments, the transfer, and store of value.
What are the four functions of money can something be considered money if it does not fulfill all four functions? ›
functions of money;(i) Medium of exchange(ii) Measurement of value;(iii) Standard of deferred payments(iv) Store of value.In the long run, something will not function as money if it does not fulfill all four functions.
What is the function of the medium of exchange of money? ›
Medium of Exchange: Right from the beginning, money has been performing the important function of medium of exchange in the society. Money facilitates transactions of goods and services as a medium of exchange. Producers sell their goods to wholesalers in exchange of money.
