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Chapter 10: Problem 2

What gives money its value?

Short Answer

Expert verified
In short, money gets its value from its purchasing power i.e., the amount and quality of goods and services it can buy. The value of money also significantly depends on the level of trust that people have in its ability to act as a store of value and means of exchange.

Step by step solution

01

Definition of Money

Money, in simplest terms, is a medium of exchange. It is used to exchange goods and services, and it is accepted universally. Instead of bartering goods and services directly, money allows the transaction to be divided into two separate portions, sale and purchase, providing more flexibility to the economy.
02

Purchasing Power

The value of money is basically determined by its purchasing power. Purchasing power indicates how much goods or services one unit of money can buy. When the price level goes up, a unit of money buys less goods and services, therefore the purchasing power of money goes down and hence the value does as well.
03

Trust and Money

Another critical aspect that gives money its value is trust. Money is valuable because people believe it to be so. Intrinsic value of some forms of money to make it valuable, such as the gold or silver used in precious metal coins. Today, most money, like the currency in most countries, has no intrinsic value or backing. Instead, the worth of money comes from the trust and confidence people have that they will be able to exchange such money for other goods and services.

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