Question

The three functions of money are: a. Liquidity, store of value, and gifting. b. Medium of exchange, unit of account, and liquidity. c. Liquidity, unit of account, and gifting. d. Medium of exchange, unit of account, and store of value.

Short answer

The correct answer is d: medium of exchange, unit of account, and store of value.

Step-by-step solution

Identify the Core Functions of Money

Understand that money serves three main functions in an economy: it acts as a medium of exchange, which facilitates transactions between parties; as a unit of account, which provides a common measure for valuing goods and services; and as a store of value, which allows individuals to preserve wealth over time.

Analyze the Options

Examine each option to see which accurately lists the three functions of money. - Option a mentions liquidity and gifting, which are not functions of money. - Option b includes liquidity, which is not a core function of money. - Option c also includes liquidity and gifting, both of which are incorrect. - Option d lists medium of exchange, unit of account, and store of value, aligning with the functions identified in Step 1.

Select the Correct Option

From the analysis, determine that the correct option is d, as it correctly identifies all three functions of money as medium of exchange, unit of account, and store of value.

Key concepts

Medium of Exchange

In everyday transactions, money works as a medium of exchange. This means money is used to buy goods and services quickly and efficiently. Imagine trying to trade a loaf of bread for some school supplies. It could be challenging if the person selling the supplies doesn't want bread at that moment. By using money instead, it simplifies these exchanges. It allows us to overcome the limitations of barter systems, where you need to find someone who both has what you want and wants what you have in return. This function of money is vital, as it:

• Reduces transaction time and effort.
• Eliminates the double coincidence of wants, a hurdle in barter systems.
• Streamlines trade and commerce, making our economy more efficient.

In this way, money as a medium of exchange facilitates smoother and faster transactions in our everyday lives.

Unit of Account

The unit of account function of money gives us a consistent way to compare the value of different goods and services. By providing a common measure of value, money makes it easier for us to decide how much something is worth. Think of it as a universal ruler that helps us measure economic value. For example, if a pizza costs $10 and a sandwich costs $5, it's clear that the pizza is considered to have twice the value of the sandwich.

• This common denominator simplifies the process of price marking.
• It helps in budgeting and accounting by providing a standard value reference.
• Enables clear financial reporting and analysis in businesses.

Without money as a unit of account, it would be challenging to determine the relative value of goods and services in an efficient manner.

Store of Value

Money also serves as an excellent store of value, allowing individuals and businesses to preserve their wealth over time. When you earn money, you often don't spend it all immediately. Instead, you save some for future use. This saved money retains value for a long time, as opposed to perishable items like fruits or vegetables.

• A reliable store of value allows for future planning and savings.
• It provides the flexibility to defer purchases until they're needed.
• Helps in financial security by preserving purchasing power over time.

Of course, inflation can impact the value stored in money, but generally, it's a much better option than trying to save wealth in other forms, like bartering goods, which don't last as well.