{"id":2857,"date":"2023-02-19T16:10:56","date_gmt":"2023-02-19T16:10:56","guid":{"rendered":"https:\/\/content.one.lumenlearning.com\/introductiontobusiness\/chapter\/learn-it-4-1-2-all-about-money\/"},"modified":"2025-05-20T15:34:54","modified_gmt":"2025-05-20T15:34:54","slug":"learn-it-4-1-2-all-about-money","status":"publish","type":"chapter","link":"https:\/\/content.one.lumenlearning.com\/introductiontobusiness\/chapter\/learn-it-4-1-2-all-about-money\/","title":{"raw":"Learn It 4.1.2: All About Money","rendered":"Learn It 4.1.2: All About Money"},"content":{"raw":"

Functions of\u00a0Money<\/h2>\r\n

The defining characteristics of money are that:<\/p>\r\n

    \r\n\t
  1. It serves as a medium of exchange.<\/li>\r\n\t
  2. It serves as a store of value.<\/li>\r\n\t
  3. It serves as a unit of account.<\/li>\r\n<\/ol>\r\n

    Medium of Exchange<\/h3>\r\n

    Money solves the inefficiency of the barter system. First, money serves as a medium of exchange<\/strong>, which means that money acts as an intermediary, or link, between the buyer and the seller. Instead of exchanging haircuts\u00a0for shoes, the hairstylist\u00a0now exchanges haircuts for money. This money can then be used to buy shoes or anything else. To serve as a medium of exchange, money must be very widely accepted as a method of payment in the markets for goods, labor, and financial capital.<\/p>\r\n

    In addition, a medium of exchange needs to\u00a0have the following properties:<\/p>\r\n

      \r\n\t
    1. It must\u00a0be divisible\u2014that is, easily divided into usable quantities or fractions. A $5 bill, for example, is equal to five $1 bills. If something costs $3, you don\u2019t have to tear up a $5 bill; you can pay with three $1 bills.<\/li>\r\n\t
    2. It must\u00a0be portable\u2014easy to carry. Money can\u2019t be too heavy or bulky.<\/li>\r\n\t
    3. It must be\u00a0durable. Money can't fall apart or wear out after a few uses.<\/li>\r\n\t
    4. It must be difficult to counterfeit.<\/em>\u00a0Money wouldn't have much value if people can make their own.<\/li>\r\n<\/ol>\r\n

      Store of Value<\/h3>\r\n\r\n[caption id=\"attachment_7745\" align=\"alignright\" width=\"300\"]\"sneakers Figure 1. Money is a better store of value than sneakers.[\/caption]\r\n\r\n

      Next, money must serve as a store of value<\/strong>. Consider the barter between the hairstylist and shoemaker again. The shoemaker risks having their shoes go out of style, especially if they keep them in a warehouse for future use\u2014their value will decrease with each season. Shoes are not a good store of value. Holding money is a much easier way of storing value. You know that you don't need to spend it immediately because it will still hold its value the next day or the next year. This function of money doesn't require that money is a perfect store of value. In an economy with ordinary inflation, money loses some buying power, but it retains most of its value.<\/p>\r\n

      Unit of Account<\/h3>\r\n

      Third, money serves as a unit of account<\/strong>, which means that it's the standard by which other values are measured. For example, a hairstylist may charge $30\u00a0to style someone's\u00a0hair. That $30 can buy two shirts or one pair of shoes. Money acts as a common denominator, an accounting method that simplifies thinking about alternatives.<\/p>\r\n

      So money serves all of these functions: medium of exchange, store of value, and unit of account.<\/p>\r\n

      [ohm2_question height=\"250\"]3835[\/ohm2_question]<\/section>","rendered":"

      Functions of\u00a0Money<\/h2>\n

      The defining characteristics of money are that:<\/p>\n

        \n
      1. It serves as a medium of exchange.<\/li>\n
      2. It serves as a store of value.<\/li>\n
      3. It serves as a unit of account.<\/li>\n<\/ol>\n

        Medium of Exchange<\/h3>\n

        Money solves the inefficiency of the barter system. First, money serves as a medium of exchange<\/strong>, which means that money acts as an intermediary, or link, between the buyer and the seller. Instead of exchanging haircuts\u00a0for shoes, the hairstylist\u00a0now exchanges haircuts for money. This money can then be used to buy shoes or anything else. To serve as a medium of exchange, money must be very widely accepted as a method of payment in the markets for goods, labor, and financial capital.<\/p>\n

        In addition, a medium of exchange needs to\u00a0have the following properties:<\/p>\n

          \n
        1. It must\u00a0be divisible\u2014that is, easily divided into usable quantities or fractions. A $5 bill, for example, is equal to five $1 bills. If something costs $3, you don\u2019t have to tear up a $5 bill; you can pay with three $1 bills.<\/li>\n
        2. It must\u00a0be portable\u2014easy to carry. Money can\u2019t be too heavy or bulky.<\/li>\n
        3. It must be\u00a0durable. Money can’t fall apart or wear out after a few uses.<\/li>\n
        4. It must be difficult to counterfeit.<\/em>\u00a0Money wouldn’t have much value if people can make their own.<\/li>\n<\/ol>\n

          Store of Value<\/h3>\n
          \"sneakers
          Figure 1. Money is a better store of value than sneakers.<\/figcaption><\/figure>\n

          Next, money must serve as a store of value<\/strong>. Consider the barter between the hairstylist and shoemaker again. The shoemaker risks having their shoes go out of style, especially if they keep them in a warehouse for future use\u2014their value will decrease with each season. Shoes are not a good store of value. Holding money is a much easier way of storing value. You know that you don’t need to spend it immediately because it will still hold its value the next day or the next year. This function of money doesn’t require that money is a perfect store of value. In an economy with ordinary inflation, money loses some buying power, but it retains most of its value.<\/p>\n

          Unit of Account<\/h3>\n

          Third, money serves as a unit of account<\/strong>, which means that it’s the standard by which other values are measured. For example, a hairstylist may charge $30\u00a0to style someone’s\u00a0hair. That $30 can buy two shirts or one pair of shoes. Money acts as a common denominator, an accounting method that simplifies thinking about alternatives.<\/p>\n

          So money serves all of these functions: medium of exchange, store of value, and unit of account.<\/p>\n