Firms and Money

Question 1

The Functions of Money

Answer 1

1. A medium of exchange
2. A measure of value (unit of account)
3. A store of value
4. A method of deferred payment

Question 2

A medium of exchange

Answer 2

Money provides a method to purchase goods/services.
without money, transactions were conducted through bartering (trading one type of good for another) however the goods weren’t always the same value. Exchange could only take place if there was a double coincidence of wants

Question 3

A measure of value (unit of account)

Answer 3

Money provides a mean to measure the relative value of goods/services. Money also puts a value on labour

Question 4

A store of value

Answer 4

Money has to hold its value to be used as a payment- can be kept for a long time without expiring. However, the quantity of goods/services you can buy with a set amount of money slightly fluctuates with the forces of supply and demand

Question 5

A method of deferred payment

Answer 5

Money can allow for debts to be created. Money can therefore pay for things without having money in the present, and can pay for it later. This relies on money storing it’s value

Question 6

collateral

Answer 6

something of your possession (an asset) that you lose if you can’t pay back

Question 7

limited liability

Answer 7

this is where the firm is seen as a separate legal entity from that of the owners so the owners’ personal assets are protected if the business faces legal issues/bankruptcy

Question 8

unlimited liability

Answer 8

where business owners are personally responsible for all business debts and can lose personal assets if the business fails.