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Questions and Answers
What are the three functions of money?
What are the three functions of money?
- Medium of exchange (correct)
- Store of value (correct)
- Investment vehicle
- Unit of account (correct)
What is a medium of exchange?
What is a medium of exchange?
Anything that is generally accepted in exchange for goods and services
What is the purpose of the store of value function of money?
What is the purpose of the store of value function of money?
To hold value over time
What does unit of account mean?
What does unit of account mean?
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Money can lose value during inflationary periods.
Money can lose value during inflationary periods.
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Study Notes
Three Functions of Money
- Functions include medium of exchange, store of value, and unit of account.
- These functions facilitate the acquisition of goods and services.
Medium of Exchange
- Refers to any item generally accepted in exchange for goods and services.
- Promotes economic efficiency by reducing time spent on trading.
- Eliminates the need to negotiate acceptable items between buyers and sellers.
Store of Value
- Describes an item's ability to retain its value over time.
- Physical assets like houses and artwork may retain or appreciate in value better than cash.
- Money's value can fluctuate with inflation (losing buying power) or deflation (gaining buying power).
Unit of Account
- Provides a standard measure for valuing goods and services in the economy.
- Functions as a common denominator, simplifying comparisons of relative values.
- Without money, every transaction would require detailed specifications of available barter options.
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