Which of the following are considered money in the U.S. economy? Which are not? Explain your answers by discussing each of the three functions of money. a. a U.S. penny b. a Mexican peso c. a Picasso painting d. a plastic credit card

The concept of a medium of exchange is foundational to our understanding of money. In its essence, a medium of exchange is an intermediary used in trade to avoid the complications of a barter system. For something to function as a medium of exchange, it must be widely accepted by people and businesses within an economy.

Take a U.S. penny, for example. This humble coin is a quintessential medium of exchange in the United States because it is recognized and accepted for transactions across the country. Whether you're buying gum at a local store or paying for parking, the penny serves as a convenient way to exchange value for goods and services.

However, not every form of currency serves as a medium of exchange in every economy. A Mexican peso, while valid currency in Mexico, is not typically used for transactions in the U.S. because it isn't widely accepted. This illustrates the critical role acceptance by the general community plays in determining whether something functions effectively as a medium of exchange.

A unit of account is a standard numerical unit of measurement of the market value of goods, services, and other transactions. This key characteristic of money allows us to compare the costs of various goods and services.

A U.S. penny again serves as a unit of account as it represents a measurable amount of economic value that can be used to price goods and measure profits or losses. But what about a Picasso painting? Although it is valuable, a Picasso doesn't serve as a unit of account. Its worth is subjective, and it is not a standard measure for pricing items in the economy.

The importance of a unit of account becomes especially clear when filing taxes, budgeting, or making financial decisions; we rely on consistent measures of value to compare prices and calculate costs effectively.

For something to be considered a good store of value, it needs to maintain its worth over time, allowing individuals to save and delay purchases until they desire. This aspect of money is pivotal for financial planning and long-term investments.

A U.S. penny, despite its small denomination, is designed to hold its value through time, which is why it suits this function of money. Yet, consider a plastic credit card; it does not retain value in itself and therefore doesn't serve as a store of value. It's simply a means to access funds, which themselves can be a store of value if kept in a stable currency.

In contrast, some non-monetary assets like art or real estate may also act as a store of value due to their potential to appreciate over time, as is often the case with notorious artworks like those by Picasso.

Legal tender refers to money that must be accepted if offered in payment of a debt. It's a legal designation that gives money its official status. The government decrees legal tender status to certain forms of currency which allows them to be used in settling financial obligations.

For instance, U.S. pennies, along with other U.S. coins and banknotes, have been designated as legal tender. They can be used to pay any debts, public charges, taxes, and dues in the U.S. In contrast, while Mexican pesos are legal tender within Mexico, they do not hold this status in the U.S. Thus, a creditor in the U.S. can lawfully refuse payment in pesos since they are not recognized as legal tender in this jurisdiction.

Understanding what constitutes legal tender is crucial, as it underscores the government's role in defining and regulating the money used within its borders.