THE FUNCTIONS OF MONEY
Money has three functions in the economy: It is a medium of exchange, a unit .of ,and a store of value. These three functions together distinguish money from other assets in the economy, such as stocks, londs, real estate, art, and even baseball cards. Let’s examine each of these fnictions of money in’ turn. A medium of exchange is an item that buyers give to sellers when they purchase goods and services. When you buy a shirt at a clothing store, the store gives you the shirt, and you give the store your money. This transfer of money from buyer to seller allows the transaction to take place. When you walk into a ‘Store, you are confident that the store will accept your money for the items it is selling because money is the commonly accepted medium of exchange.
A unit of account is the yardstick people use to post prices and record debts. When you go shopping, •
you might observe that a shirt costs $20 and a hamburger costs $2. Even though it would be accurate to say that the price of a shirt is 10 hamburgers and the price of a hamburger is into of a shirt, prices are never, quoted in this way. Similarly, if you take out a loan from a bank, the size of your future loan repayments will be measured in dollars, not in a quantity of goods and services. When we want to measure and record economic value, we use money as the unit of account A store of value is an item that people can use to transfer purchasing power from the present to the future. When a seller accepts money today in exchange for a good or service, that seller can hold the money and become a buyer of another good or service at another time. Of course, money is not the only store of value in the economy, for a person can also transfer purchasing power from the present to future by holding other assets. The term wealth is used to refer to the total of all stores of value including both money and non monetary assets. Economists use the term liquidity to describe the ease with.which an asset can be converted into the’. economy’s medium of exchange. Because money is the economy’s medium of exchange, it is the most liquid asset available. Other assets vary widely in their liquidity. Most stocks and bonds can be sold easily
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