14.1 The Functions of Money

What are the three main functions of money?

Medium of exchange, unit of account, and store of value.

What does it mean that money is a medium of exchange?

It’s used to buy and sell goods and services, replacing barter.

Why is money better than barter?

It avoids the need for a double coincidence of wants and enables specialization.

How does money support specialization?

It allows people to focus on producing one thing and trade for everything else.

What does it mean that money is a unit of account?

It measures the value of goods and services in a common unit (like dollars).

How does money help with comparing prices?

It lets buyers and sellers easily compare values using one standard.

What else does the unit of account function allow us to do?

Define debts, calculate taxes, and measure GDP.

What does it mean that money is a store of value?

It allows people to save purchasing power for future use.

When is money a good store of value?

When inflation is low or stable.

What are some other stores of value besides money?

Real estate, stocks, bonds, gold, art, collectibles.

What is liquidity?

How easily an asset can be converted into cash without losing value.

Why is money considered highly liquid?

It can be spent immediately with no loss of purchasing power.

What is the most liquid asset?

Physical cash.

Why is a house considered illiquid?

It takes time to sell and involves fees that reduce its value.

What does the phrase “money is what money does” mean?

Anything that performs the functions of money is considered money.

Money serves as a store of value that enables people to ________

transfer purchasing power from the present to the future