Chapter 5: Problem 7

What are the four functions that money serves?

Short Answer

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The four functions that money serves are: 1) Medium of Exchange - it acts as a common unit of account, streamlining transactions and reducing reliance on bartering; 2) Unit of Account - it provides a standard measurement for the value of goods and services, allowing informed comparisons; 3) Store of Value - allows individuals and businesses to save and store wealth, retaining its value over time; and 4) Standard of Deferred Payment - facilitates credit transactions and payment of debts over time.

Step by step solution

1. Medium of Exchange

A medium of exchange is the primary function of money. It allows people to easily buy and sell goods and services using a common unit of account, making transactions more efficient and streamlined. Without a medium of exchange, societies would need to rely on bartering, which can be more cumbersome and less efficient.

2. Unit of Account

As a unit of account, money provides a standard measurement for the value of goods and services. This helps people in making comparisons between the values of different goods and comparing prices across different markets. With a common unit of account, individuals and businesses can make more informed decisions when trading goods and services.

3. Store of Value

Money acts as a store of value, allowing people to save and store their wealth in a form that can be easily accessed and utilized when needed. This means that money can be saved today and spent in the future, as it retains its value over time. This function is essential for both consumers, who might need to save for unexpected expenses, and businesses, who need to plan their investments and finances.

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 as a means to settle debts and other financial obligations, which can be paid off over time. This function helps in facilitating credit transactions and allows individuals and businesses to borrow money to fund investments or address immediate needs, with the understanding that the debt will be repaid with money in the future.

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