Question

Describe the three functions of Money?

Answer 1

Medium of Exchange- The most significant role of Money is to promote transactions as a means of exchange. Both transactions will have to be carried out by barter without money, which implies direct exchange of one good or service for another. The problem with a barter scheme is that in order to receive a specific good or service from a supplier, a good or service of equivalent value must be owned, which the supplier still requires. In other words, trade can only take place in a barter system if there is a double chance of will between two parties involved in transaction. However, the chance of a double occurrence of wanting is minimal and makes the exchange of goods and services very difficult. Money effectively eliminates the double coincidence of want problem by serving as an exchange medium accepted by all parties in all transactions, irrespective of whether they want the goods and services of each other.

Store of Value- Money must maintain its value over time in order to become a medium of exchange; that is, it must be a store of value. If money could not be held for a certain period of time and still remain valuable in exchange, the double coincidence of want question will not be solved and thus not accepted as a medium of exchange. Money isn't unique as a value store; there are several other value stores, such as property, art works, and even baseball cards and stamps. Money may not even be the best value store, because inflation depreciates it. Money is therefore more flexible than most other value stores as it is widely embraced everywhere as a medium of trade.

Unit of Account- Money also acts as an unit of account , which provides a specific measure of the value of the traded goods and services. In terms of money, knowing the value or price of a good helps both the manufacturer and the consumer of the good to make decisions about how much of the good to supply and how much of the good to buy.