Function of Money
SSEMA2 Explain the role and functions of the Federal Reserve System.
a. Explain the roles/functions of money as a medium of exchange, store of value, and unit of account/standard of value
a. Explain the roles/functions of money as a medium of exchange, store of value, and unit of account/standard of value
Throughout history, money has taken many forms. We have used items like shells, animal skins, and precious metals as money. Money is what money does. Any item that serves the three main functions of money efficiently is good money. In most economies today, we use a type of money called fiat money. Fiat money is the official money issued by the government of a country. In most cases today, a country’s money works because of trust in the good faith and credit of the country’s government. As long as people are willing to accept a country’s money as a method of payment, the money functions effectively. Maintaining confidence in the U.S. monetary system is an important role of the Federal Reserve. For money to have value, people must believe it has value and it must serve the following three functions: medium of exchange, store of value, and unit of account (standard of value). Money used as a medium of exchange facilitates transactions between individuals, businesses, financial institutions, and governments in an economy. When a household wants to purchase groceries, it will use money to facilitate the transaction. The household could use cash, write a check, or swipe a debit card linked to a checking account. All of these methods of payment involve using money as a medium of exchange. The money payment people earn is income. Many people today receive this money payment through direct deposit into a checking account. After receiving their money payment, most people will designate some of the money for spending and some of the money for saving. When people hold money as savings for purchases sometime in the future, money functions as a store of value. People avoid holding savings if they fear a loss of purchasing power in the future. The belief that money saved today will purchase a similar amount of goods and services in the future is the function store of value. Money also functions as a guide. In the United States, the dollar is our unit of currency. When we look at our bank account balance or shop for goods and services, we see an amount expressed in dollars. This allows us to compare prices and determine whether we have enough in our account to make a particular purchase. This function of money is unit of account (or standard of value).
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