Money and Banking: Lecture 2 - Functions of Money 1
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These basic functions help to create the foundation of the money system.
The Four Basic Functions of Money Now, let's take a look at how economists view the basic functions of money.
Money serves four basic functions: it is a unit of account, it's a store of value, it is a medium of exchange and finally, it is a standard of deferred payment.
Let's take a look at each one of these functions with the help of Margie the cake baker and Bob the lawn guy.
Money Is a Unit of Account Money is a unit of account because everything in the economy is quoted in terms of it.
For example, when Margie sells cakes in her bakery, she offers the cakes for sale at a certain price.
That price is quoted in terms of money.
Let's say she has a chocolate cake selling for ten dollars - that's a really good one, by the way.
When Bob sells his lawn service, the price of his service is quoted in dollars, also.
Since Bob is not the only customer Margie has, and Margie isn't Bob's only customer, they need a unit of account that works for everyone in the economy.
In this way, money functions as a unit of account, which is the foundation of every transaction taking place around us.
Money Is a Medium of Exchange Money is a medium of exchange because it can be used to satisfy unlimited needs and wants.
For Bob, he wants chocolate cake who doesn't?
Bob is a business owner in the town of Ceelo.
Every time he buys a cake from Margie's bakery, he exchanges the money he earned from his job for a cake.
Money serves as an important medium of exchange in the economy, empowering people to purchase goods and services in an attempt to satisfy their unlimited needs and wants.
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Money Is a Store of Value Money is a store of value because Bob can exchange his lawn services for money one day and then use it to purchase goods and services at a later date.
When he earns his paycheck, he cashes it at the bank, for example.
Bob can hold on to that cash in his wallet for a few minutes, a few days or even a few months or years before he decides to exchange the money for one of Margie's outrageously, decadently delicious, chocolate cakes.
Unfortunately, inflation prevents most of the money in existence today from serving as a pure store of value, because the money loses a significant portion of its purchasing power over time.
However, if there were no inflation, then money would serve as a near-perfect store of value.
Money Is a Standard of Money and more cash advance Payment Finally, money is a standard of deferred payment because it's sometimes used to buy something today and pay for it over time.
For example, when Bob needs a new commercial lawn mower with a built-in TV and a roach taser everybody needs one of thosehe borrows the money from the bank.
They require him to make a small down payment of cash today; however, he pays for most of the cost of the mower through monthly loan payments over time.
When Bob buys now and pays later over time, money is money characteristics and functions as a standard of deferred payment.
For something to be considered source, it must be a money characteristics and functions of account, a medium of exchange and a store of value.
For example, gold is not considered money, because it is not used as a medium of exchange at least in most places in the world.
In addition, it does not serve as a unit of account.
It may, however, serve as a store of value.
The Mona Lisa painting with a fake mustache painted over it is not money.
It does serve as a store of value, however, and I would argue that, with the mustache that's been added, it could be worth money characteristics and functions more than it was before.
However, it isn't a medium of exchange or a unit of account.
Therefore the Mona Lisa is not money.
Lesson Summary Okay, it's time to review.
Money serves four basic functions: 1.
It is a unit of account.
It is a store of value.
It is a medium of exchange.
It's a standard of deferred payment.
Learning Outcome After completing this lesson, you should be able to describe the four basic functions of money in the economy and identify units that qualify as money.
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Meaning & Functions of Money
This video is about Functions and Characteristics of Money 2016.
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