Identify the four functions of money and give examples of each in your own words.

Question

What will be an ideal response?

Answer 1

Money’s four functions are: (1) to act as a medium of exchange, (2) a unit of account, (3), a store of value, and (4) a means of deferred payment. Examples will vary but should demonstrate understanding of each of money’s four functions. A sample answer is: Money’s function as a medium of exchange can be seen when a customer pays $50 to a clothing store and receives a new shirt in return. Money’s function as a unit of account can be seen in how it is a consistent measure of value. For example, a person knows a gallon of gas will cost $3.50 or a pint of ice cream will cost $4.99, but it would be difficult to determine how many sheets of paper are equal in value to a gallon of gas or a pint of ice cream. Money’s function as a store of value can be seen when people keep their life savings in a bank or in the form of physical currency. They could store the same amount of value in rare books, but then they would have to build storage for the books and eventually find buyers. In the meantime, the value of the books could decrease, while the value of the money would stay relatively constant. Money’s function as a means of deferred payment is seen when a person takes out a mortgage in exchange for a house and then makes payments on the mortgage for the next 30 years. Money’s relatively consistent value means that payments made years later will cost the borrower about the same amount.