Question

1. What is “money”, exactly? 

2. Please name three items that may be used as money, at least in theory, and name two items that could NEVER be used as money. What is the difference between these two groups? 

3. What properties and characteristics should any type of money possess in order to be used as money? 

4. What three functions should all types of money be able to perform?

Answer 1

Money- Money is an invention of human being on which rest of every activities are based. It is like a wheel around which economic science clusters. With the help of money goods and services can be sold and purchased.

Answer- Cheques, credit cards , gold can be used as money. Animals cannot be used as money.

Answer 3) Features of money.

It should be accepted by all.

It should be highly liquid and be used to have international trade as well.

Answer-4)

Functions of money

Basically, money has three main functions. Three functions are medium of exchange, store of value and unit of account. Money is often defined in terms of the three functions or services that it provides.

Medium of exchange

Money's crucial and important function is medium of exchange. It means to give way to transactions. Without money, all transactions could have to be conducted by barter, which involves direct exchange of one good or service for another. The problem with a barter system is that in order to have a typical good or service from a seller, one has to keep a good or service of equal value under his possession, which the supplier also want from the other person . It means, in a barter system, exchange can take place only if there is a double coincidence of wants between two transacting parties. The likelihood of a double coincidence of wants, however, is small and makes the exchange of goods and services rather difficult. Money effectively eliminates the double coincidence of wants problem by serving as a medium of exchange that is accepted in all transactions, by all parties, regardless of whether they desire each others' goods and services. Money gives the most efficacious method of satisfying wants. Each consumer has a different set of wants. Money makes him (her) able to decide which wants to satisfy, rank the wants in order of urgency and capa­city (income) and act accordingly.

Store of value

In order to be a medium of exchange, money must hold its value for a long time period. It reveals that it should have a feature of store of value. If money is not worthy to be stored for some period of time and still remain valuable in exchange, it would not solve the double coincidence of wants problem and therefore would not be adopted as a medium of exchange. As a store of value, money is not unique; many other stores of value exist, such as land, works of art, and even baseball cards and stamps. Money is not good for store for a long time because it will loose its value with increase in inflation. Nevertheless, money is more liquid than most other stores of value because as a medium of exchange, it is accepted everywhere. Furthermore, money is an easily transported store of value that is available in a number of convenient denominations.

Unit of account

Money also works as a unit of account, bestowing a common measure of the value of goods and services being exchanged. Due to having knowledge of value or price of a good, in relation of money, enables both the seller and the buyer of the good can have decisions about how much of the good to supply and how much of the good to purchase.