Money and Its basic Functions with questions answers

Functions of Money

Money is anything that is widely accepted in exchange for goods and services and payment of debts. Money has three main functions or services that it provides. It serves as a medium of exchange, store of value, and as a unit of account.

Following points highlight some basic functions of money:

The medium of exchange.

Earlier before, the introduction of the money barter system existed. i.e. exchange of one commodity for other irrespective of their desire to get it or not. There is, however, a small chance of double coincidence of wants. But Money virtually eliminates the problem by serving as a medium of exchange. As a medium of exchange, it is accepted in all transactions by all parties, regardless of whether they desire each other’s goods and services.

Store of value.

Money's other essential function is the store of value. Money is more liquid than most other value stores because it is readily accepted everywhere as a medium of exchange.

Money is used as a store of purchasing power. We can hold money for a period of time to finance future payments. More­over, people save money, as they assure that the money, they have saved will have value when they wish to spend it in the future.

Unit of account.

Money acts as a unit of account. It provides a standard measure of the value of exchanged goods and services. Money is used to measure and record financial transactions and the value of goods or services produced in a country over time. When the supplier and purchaser know the value or price of a good, in terms of money, it enables both to decide how much of the good to supply and how much of the good to purchase.

Measure of Value

Money acts as the measuring bar for any transaction. The value of all goods and services is expressed in terms of money. By acting as a common denominator, it permits everything to be priced and valued in terms of money. Thus, people are enabled to com­pare different prices and therefore see other goods and services' relative values.

Transfer of Value:

Money also serves for the transfer of value. Money is easily transferrable in any transaction or any corner of the world. It facilitates the buying and selling of goods in the domestic country and other parts of the world.

Conclusion:

Money gets often confused with other things, like income, wealth, and credit. Money functions as a suitable unit of account. Any commodities or services value can be expressed in monetary terms. If the cost prices of all goods and services rise in monetary terms, i.e., there is an increase in the general price level. These basic functions of money made it easy for people to do any transaction easily and quickly.

Questions:

1. Barter is inconvenient because
a. of the double coincidence of wants.
b. large amounts of money are required.
c. gold is bulky and difficult to transport during day-to-day transactions.
d. because resources are limited.



2. Compared to the barter system, a monetary system
a. increases transaction costs.
b. decreases the number of transactions.
c. requires that prices be negotiated for every transaction.
d. reduces transaction costs and facilitates exchanges.



3. The main functions of money are
a. medium of exchange and unit of account.
b. medium of exchange, unit of account, and store of value.
c. medium of account and store of value.
d. store of value and unit of account.



4. A medium of exchange is
a. something that is generally acceptable in exchange for goods and services
b. a legally recognized asset that is generally accepted in exchange for goods and services.
c. something that circulates and provides a standardized means of evaluating the relative price of goods and services.
d. the ability of money to command purchasing power in the future



5. A unit of account
a. something that is generally acceptable in exchange for goods and services
b. a legally recognized asset that is generally accepted in exchange for goods and services.
c. something that circulates and provides a standardized means of evaluating the relative price of goods and services.
d. the ability of money to command purchasing power in the future



6. Store of value
a. something that is generally acceptable in exchange for goods and services
b. a legally recognized asset that is generally accepted in exchange for goods and services.
c. something that circulates and provides a standardized means of evaluating the relative price of goods and services.
d. the ability of money to command purchasing power in the future