Chapter 27: Problem 7

What are the four functions that money serves?

Short Answer

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The four functions of money are as follows: 1) Medium of Exchange: Money is used in transactions to buy and sell goods and services, simplifying trade by eliminating the need for barter. 2) Unit of Account: Money provides a standard measure for determining the value of goods and services, allowing comparison of relative worth and facilitating price assignment. 3) Store of Value: Money enables people to save their purchasing power by holding onto it, supporting savings and investments for long-term financial stability and growth. 4) Standard of Deferred Payment: Money offers a way for individuals and businesses to borrow, lend, and make future payment agreements, facilitating credit transactions and economic growth.

Step by step solution

1. Medium of Exchange

Money serves as a commonly accepted medium of exchange in an economy. This means that it is used in transactions to buy and sell goods and services. It simplifies the trade process by eliminating the need for barter, where people would exchange goods and services directly without the use of money. By serving as a medium of exchange, money enables a more efficient and organized economy.

2. Unit of Account

Money also serves as a unit of account. This means that it provides a standard measure for determining the value of goods and services in an economy. It allows individuals and businesses to compare the relative worth of different items and make informed decisions about consumption, production, and investment. By providing a common unit for measuring value, money simplifies the process of assigning prices to goods and services, which is important for markets to function properly.

3. Store of Value

Another function of money is that it serves as a store of value. This means that people can save their money now and use it to purchase goods and services in the future. Money allows individuals to save their purchasing power over time by holding onto it. This function is essential for individuals and businesses to make savings and investments, ensuring long-term financial stability and growth in the economy.

4. Standard of Deferred Payment

Lastly, money serves as a standard of deferred payment. This means that it provides a way for individuals and businesses to borrow, lend, and make agreements for future payments. Money is used as a common basis for repaying debts and settling financial obligations over time. This function is important in facilitating credit transactions, investment, and economic growth. In summary, the four functions that money serves in an economy are as a medium of exchange, a unit of account, a store of value, and a standard of deferred payment. Each of these functions plays a crucial role in facilitating trade, investment, and overall economic activity.

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