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Chapter 27: Q.7 (page 662)

What are the four functions that money serves

Short Answer

Expert verified

The four functions that money serves are:

1. Store of value.

2. Standard of deferred payment.

3. Medium of exchange.

4. Unit of account.

Step by step solution

01

Concept of how money serves.

Money is used to purchase or pay for goods and services. It is a means of exchanging products or services between two persons. Both sellers and purchasers recognize it.

02

Explanation of solution.

Four functions of money are as follows:

1.Store of money: Money is a highly liquid asset that can be used as a store of value (Liquid asset means easily can be spent when require). Money has the ability to retain its purchasing power in the future.

2.Standard of postponed payment: This indicates that anything can be purchased today and paid for later. Agreements and loans are made in order to make future payments. As a result, the deferred payment standard enables for payment of goods and services received today in the future.

3.Medium of exchange is: Money acts as a middleman between the buyer and the vendor. If one person wants to buy something, he has to give something else to the other person in a barter system, but now any items or services can be purchased in exchange for money.

4.Unit of account: The value of money of those things and services is now used to calculate the worth of those goods and services. It's a common denominator, which makes weighing trade-offs easier.

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Most popular questions from this chapter

31. Humongous Bank is the only bank in the economy. The people in this economy have \(20million in money, and they deposit all their money in Humongous Bank.

a. Humongous Bank decides on a policy of holding 100%reserves. Draw a T-account for the bank.

b. Humongous Bank is required to hold 5%of its existing \)20million as reserves, and to loan out the rest. Draw a T-account for the bank after it has made its first round of loans.

C. Assume that Humongous bank is part of a multibank system. How much will money supply increase with that original $19million loan?

For the following list of items, indicate if they are in M1, M2, or neither:

  1. Your 5,000 line of credit on your Bank of America card.
  2. 50 dollars鈥� worth of traveler鈥檚 checks you have not used yet .
  3. 1 in quarters in your pocket
  4. 1200 in your checking account
  5. 2000 you have in a money market account

What is the asset-liability time mismatch that all

banks face?

What are a bank's assets? What are its liabilities?

What is the risk if a bank does not diversify its

loans?
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