Anonymous asked in Social ScienceEconomics · 1 decade ago

Describe the 4 functions of money using the US dollar to provide and example of how dollar serve each function

1 Answer

  • 1 decade ago
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    Medium of Exchange

    • Unit of Account (important for quoting prices, writing contracts)

    • Store of Value

    • Standard of Deferred Payment


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    2The Value of Money• Value of money (in terms of goods): inverse of the price level• Real return on money between one period to the next: ratio of next period price level to the current price level ( = the inflation rate)Features of MoneyWhatever serves as money should be• Easy to carry• Hard to counterfeit• Durable• Divisible• Be stable in value


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    3The Evolution of Money• Commodity Money System (typically precious metals)- 1 dollar is a fixed amount of gold- if paper dollar exist, they can be converted into gold• Fiat Money System- 1 dollar is a piece of paper issued by the government- it is a claim to nothing at all- it is a legal tenderNon-Cash Payments• Checks• Direct debit transactions• Debit cards• Wire transfers (Fedwire, CHIPS) among banks• Automatic clearinghouses (ACH)• e-money (stored-value cards; e-cash/checks)


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    4Measuring Money• Money definitions frequently change with financial innovation• Narrow and broad money supply series do not move together closely• Short run money data are inaccurate in short run (bank reporting deadlines; seasonal adjustment)-> money supply data hard to interpret in the short run when policy decision must be made)-> most central banks have given up formulating targets for the money supply

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