ECON 0110 1st Edition Lecture 25WHAT IS MONEY?The primary function of money is that it should serve as a MEDIUM OF EXCHANGE orMEANS OF PAYMENT:Money is any item that is commonly used by buyers and commonly accepted bysellers as a medium of exchange.Use of money eliminates the need for barter which is inefficient.Besides serving as a MEDIUM OF EXCHANGE, money has several other functions that make ituseful.FUNCTIONS OF MONEY1. MEDIUM OF EXCHANGE2. UNIT OF ACCOUNT3. STORE OF VALUEMoney serves as a UNIT OF ACCOUNT:Any item that serves as money should serve as an agreed upon measure forstating the prices of goods and servicesTo serve as a unit of account, the item used as money should be able to designate the price ofall items.Thus, money should be able to be broken into small fractions.I.e.: a piece of candy might cost 1 penny, while a house might cost $500,000These notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.Suppose we used diamonds as money. It would be difficult to state the prices of things in termsof diamonds. A house might cost 100 diamonds, or a piece of candy might cost one one-thousandth of a diamond.To be useful, money should serve as a STORE OF VALUEAny item that is used as money should be able to be held for a period of time sothat it could be used for payment later without losing value.Thus, any item used as money should retain its purchasing power over time.During periods of high inflation, currency loses value rapidly. Thus, it loses its usefulness as astore of value.If the item serving as money is losing value rapidly, people will try to get rid of the item and replace it with something that retains value over
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