Question

Everyone knows what money is. It is the collection of coins and bills that we carry around in our pockets, purses. and wallets. Or at least that people often think that is what money is? In fact, “money” is merely a “social convention” as described by the text – Money is “what it does” rather than “what it is.”

i.     (1) Briefly describe three (3) of the four (4) functions that must be present to make money, well, money, AND; (2) It is often debated whether “crypto-currencies” such as BitCoin or Ethereum or perhaps the forthcoming “Libra” from Facebook, actually are “money?” WHICH “function” of money causes the biggest question for these crypto-currencies and WHY is this the case?

Answer 1

Three important functions of money are:

1. Medium of exchange: Money acts as a medium for sale and purchase of goods and services. In the absence of money goods were exchanged for goods. This required double coincidence of wants. Implying that exchange was difficult and therefore limited. Introduction of money has separated the acts of sale and purchase and thus made exchange much easier.

2. Measure of value: Money serves as a measure of value. In other words it serves as a unit of account. Unit of account means that the Value of each good or service is measured in the monetary unit. It is because of the existence of money as a common unit of value that we are able to construct consumer price index and wholesale price index.

3. Store of value: store of value implies store of wealth. Storing wealth has become considerably easy with the introduction of money. Stored wealth is a source of future investment and investment is the key to growth and development.

The cryptocurrency is not considered as money because it does not fulfill the third function that is is does not serves as store of value. This means that in future the individual will definitly get the same amount invested back but with cryptocurrency it is not possible as these are very fragile and prices of these tend to fluctuate a lot. So it is said that it does not serves as a stoee of value and hence, is not considered as money.

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