Chapter 14: Problem 7

What are the four functions that money serves?

Short Answer

Expert verified

The four primary functions of money are: 1) medium of exchange, which allows for easy and quick transactions between parties, 2) measure of value, enabling us to compare the worth of various items, 3) store of value, preserving our wealth by transferring our purchasing power from the present to the future, and 4) standard of deferred payment, used to settle debts or future obligations such as loans and mortgages. These functions promote a stable and prosperous economy by facilitating trade, investment, savings, and financial agreements.

Step by step solution

Introduction

Money is a medium that people use to buy goods and services. It has four primary functions: medium of exchange, measure of value, store of value, and standard of deferred payment. Each function plays an essential role in our economy.

1. Medium of Exchange

The first function of money is as a medium of exchange. It means that money is used to buy products and services from others. Instead of using an inefficient system of barter, where goods and services are directly exchanged between individuals, money is a universally accepted medium that allows for easy and quick transactions between parties. For example, you can use money to buy groceries at a supermarket or pay for a haircut at a salon.

2. Measure of Value

The second function of money is that it serves as a measure of value. In an economy, all goods and services have a specific value that can be represented in terms of money. This allows us to compare the worth of various items, making it easier to decide which ones to buy or sell. For instance, if you want to purchase a car, you can compare different car models by looking at their prices, which are expressed in terms of money.

3. Store of Value

The third function of money is to act as a store of value. When we save or invest money, we expect that it will hold its value over time and can be later used for making purchases or investments. Money allows us to preserve our wealth by transferring our purchasing power from the present to the future. For example, if you save money in a bank account or invest in stocks, you hope that the value of your savings or investments will not diminish due to inflation or other economic factors.

4. Standard of Deferred Payment

The fourth function of money is to serve as a standard of deferred payment. This means that money can be used to settle debts or future obligations. It helps us to create and maintain credit agreements and financial contracts that span over a period of time, such as loans or mortgages. For instance, when you take out a loan to buy a house, you agree to repay the loan in the form of money over a specified period. Now, you are familiar with the four primary functions of money: medium of exchange, measure of value, store of value, and standard of deferred payment. These functions help to create a stable and prosperous economy by facilitating trade, investment, savings, and financial agreements.