The Functions Of Money

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Money serves as a medium of exchange, a measure of value, and a store of value. As a medium of exchange, money is the payment made to economic resources for their services, which the owners of these resources use to purchase goods and services. For example, labor is paid a money wage; individuals use this money to purchase food, clothing, and shelter. Paper currency and check-writing accounts comprise the medium of exchange in most countries. While paper currency issued by the federal government has no intrinsic value, it is accepted for transactions because it has value in exchange. Check-writing deposits are liabilities of banks. Money serves as a measure of value in that it is the common denominator for measuring prices, costs, revenues, and income. For example, a newspaper costs 500; Corporation A reports revenues of $100 million; workers at Corporation B earn $9.85 per hour. Money functions as a store of value in that the money received today can be saved and held for expenditures at some future date.

EXAMPLE 9.1. Although coins have metal content, their value as a metal is less than the face value of the coin. Paper currency has no intrinsic value in the United States since it consists of Federal Reserve notes which are non-collateralized liabilities of the Federal Reserve, i.e., the Federal Reserve holds no specified commodity to back up the paper currency that it has issued. U.S. paper currency and coins are therefore fiat (faith) money since their value as a medium of exchange exceeds their nonmonetary value. In the United States, check-writing accounts are deposits at commercial banks, savings banks, savings and loan associations, and credit unions; ownership of funds in these deposit accounts is transferred from one owner to another by the writing of a check.

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