Functions of Money Flashcards
List the two primary functions of money.
Medium of Exchange
Measure of Value
How does money solve the problem of double coincidence of wants from a barter system?
Money acts as a universally accepted medium of exchange. You don’t need to find someone who wants your exact good; you only need someone willing to accept money in exchange.
Explain the concept of “store of value” as a function of money.
Money allows you to save purchasing power for the future. Unlike bartering with perishable goods, money (within reason) retains its value over time.
Describe three secondary functions of money.
Transfer of Value: Money can be easily transferred between people, places, and purposes.
Standard for Deferred Payments: Money creates a standard for loans, installments, and other payments made over time.
Store of Value
Why is money considered a better medium of exchange than bartering?
Money eliminates the need for a double coincidence of wants, is universally accepted, and can be easily divided into smaller units for varying transaction sizes.
How does money function as a measure of value?
Money provides a common standard to express the prices of goods and services, making it easier to compare them and make informed decisions about purchases.
Explain the time dimension of money’s “store of value” function.
Money allows you to save purchasing power. Unlike many bartered goods, its value is relatively stable over time, enabling you to use it for future purchases.
Describe the “standard of deferred payment” function of money.
Money allows for contracts and agreements where payments are made over time (like loans). It provides a reliable standard for determining the value of these future payments.
How does money act as the basis of the credit system?
Money’s stability and universality make it a reliable standard for lending and borrowing. This allows individuals and businesses to access funds they wouldn’t otherwise have.
Explain how money facilitates the creation and redistribution of national income.
Money is used for tax collection and government expenditures. This allows governments to fund public services, infrastructure, and programs that can impact income distribution and economic growth.
How does money contribute to the distribution of national income?
Money is used to pay wages, rent, interest, and profits, forming the income streams for individuals and businesses within an economy. Government policies surrounding money can also impact income distribution.
Explain how money helps businesses maximize satisfaction for consumers.
Money allows consumers to express their preferences through their spending patterns. Businesses respond to this by allocating resources and producing goods that consumers value, aiming to maximize consumer satisfaction.
Describe how money increases the productivity of capital assets.
Money, being highly liquid, can be easily converted into different forms of capital (equipment, buildings, etc.). This allows businesses to shift capital quickly towards more productive uses, increasing overall efficiency.
How does money act as a “basis of liquidity”?
Money is the most liquid asset, meaning it can be easily converted into other forms. This allows businesses and individuals to quickly meet financial obligations and take advantage of opportunities.
How does money act as a basis of the credit system?
Money is the foundation of credit. Because money can be easily exchanged for goods and services, it can be loaned and borrowed. This allows banks and other financial institutions to create credit, which can help to stimulate the economy.
