Describe the 4 functions of money using the US dollar to provide and example of how dollar serve each function
1) Medium of Exchange - money is a good for which all other good exchange
2) Store of value - the purchasing power can stored over time.
3) Unit of account - money can be used as a common dominator to express the values of most good and services.
4) Market Liquidity - money is easy tradable for goods.
You can explain how the dollar serve each function yourself.
We say traditionally that money has four major functions. It is a
medium of exchange
Whatever people usually give in exchange for the things that they buy is the medium of exchange. As we have seen, this is the function that defines money.
ex. you buy 1lb of meat in exchange for $1.
unit of account
The unit of account is the unit in which values are stated, recorded and settled. The differences between this and the medium of exchange may seem subtle, but there are a few cases in which the unit of account is different from the unit in which the medium of exchange is expressed. In Britain a few decades ago, Guineas were often used as the unit of account, while the medium of exchange was expressed in Pounds. Both Guineas and Pounds in turn could be expressed in shillings -- the Pound was 20 shillings and the Guinea was 21 shillings. (British currency has since been redefined).
add'l ex. my $1 in USA is $1. but if i go to thailand $1 is no longer $1 but more like Baht38+- but baht is Baht 1 in thailand.
standard of deferred payment
This is the unit in which debt contracts are stated. Deferred payment means a payment made in the future, not now. Here, again, it is usually the same as the medium of exchange, but not always. During periods of inflation, people may accept paper money for immediate payment, but insist on some other medium, such as real goods and services or gold, for deferred payment -- because the medium of exchange would lose much of its value in the meanwhile.
ex. assuming $ is volatile, we enter in to a contract in which I will build you a house, but the house will take 2 years to build. we enter in to a debt contract in which payment is made on staggered basis or upon completion. since it is, 2 years from now, i state in my coontract that you pay me in Gold in XX troy ounce. because $ at present is very unstable
store of value
Again, this is something that people keep in order to maintain the value of their wealth. Again, while it would usually be the same as the medium of exchange, in inflationary times other media might be substituted, such as jewelry, land or collectable goods. In this sense, money is "set aside" for the future.
ex. today i am worth 1000 dollars in actual money, but due to "inflationary times" where dollars is becoming worthless, I then substitute (invest) in jewelry or land, on the assumption that these goods will not depreciate as bad as the "money".
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