Money: Functions, Types, and Characteristics

20 question-and-answer flashcards covering types of money, the four functions of money, characteristics of a good medium of exchange, and related key concepts.

How do economists refer to the difficulty of finding two traders who each have what the other wants in a barter system?

The problem of the double coincidence of wants.

What type of money is defined as a good that also has value independent of its use as money?

Commodity money.

What type of money is authorized by a central bank and need not be exchangeable for gold or another commodity?

Fiat money.

The U.S. dollar can best be described as what type of money?

Fiat money.

Which of the following is NOT a function of money: store of value, medium of exchange, unit of account, or open-market operation?

Open-market operation.

What are the four standard functions of money?

Medium of exchange, unit of account, store of value, and standard of deferred payment.

When money is acting as a store of value, what does it allow an individual to do?

Transfer purchasing power into the future.

Why is money an imperfect standard of deferred payment?

Inflation can reduce its purchasing power over time.

List three broad benefits that using money provides compared with barter.

Eliminates the double coincidence of wants, reduces transaction costs, and allows for greater specialization.

Why did the pigs, poultry, and fruit paid to Mademoiselle Zelie fail to serve as money?

They spoiled and were not widely acceptable, so they did not fulfill all four functions of money.

In post-war China, why did U.S. soldiers treat Chinese paper currency as commodity money?

Because the paper itself could be recycled and had value even though the notes were no longer accepted as money.

What is the economic definition of money?

Any asset that people are generally willing to accept in exchange for goods and services or for payment of debts.

Which of the following is NOT a function of money: acceptability, store of value, unit of account, or medium of exchange?

Acceptability (it is a characteristic, not a function).

What acceptability condition must a good satisfy to serve as a medium of exchange?

It must be generally accepted by most buyers and sellers.

Why must a good used as money be durable, divisible, standardized, and valuable relative to its weight?

These characteristics make it practical and efficient as a medium of exchange.

Which of the following would be the least desirable medium of exchange—seashells, gold, milk, or dollar bills?

Milk, because it spoils and lacks durability.

Money serves as a unit of account when what occurs?

Prices of goods and services are expressed in terms of money.

Money serves as a standard of deferred payment when what occurs?

Payments agreed to today but made in the future are denominated in money.

What does the term “intrinsic value” denote in the context of money?

The value a commodity money has independent of its use as money, such as gold’s value for jewelry.

Give an example illustrating the double coincidence of wants in barter.

I want bread and the baker wants apples; both of us must simultaneously desire what the other offers for the trade to occur.