Functions and Characteristics of Money (Econ)

Study Notes

Functions of Money

Serves as a medium of exchange, facilitating trade and transactions.
Acts as a store of value, preserving purchasing power over time.
Provides a standard of value (unit of account), allowing for the comparison of different goods and services.

Characteristics of Money

Durability: Money must withstand physical wear and tear to retain its functionality.
Portability: Money should be easy to carry and transport, enhancing its usability in transactions.
Divisibility: Money can be divided into smaller units without losing its value, accommodating various transaction sizes.
Uniformity: Ensures standardization in form, which means each unit is identical in value and appearance.
Limited Supply: A controlled quantity of money in circulation prevents inflation and maintains value; involves recycling of currency.
Acceptability: Money must be widely accepted and trusted by users as a valid medium for transactions.

Types of Money

Fiat Money: Has value assigned by government decree rather than intrinsic worth; its legitimacy comes from legal status.
Commodity Money: Physical items with inherent value (such as gold or silver) that are used as a medium of exchange.
Representative Money: Represents a claim on a commodity; for instance, receipts that confer ownership of a specific amount of a commodity.

Additional Term

Default: The failure to repay a loan, which can have serious financial consequences for the borrower.

Description

This quiz focuses on the essential functions and characteristics of money in economics. It covers concepts such as medium of exchange, store of value, and the key properties that make money effective. Test your understanding of these fundamental economic principles.