Problem :
Describe the basic functions of money.
There are four basic functions of money. First, money
is a medium of exchange. Buyers use a medium of exchange
to compensate sellers in exchange for goods and services. Second,
money is a unit of account. A unit of account is
simplifies the exchange of goods and services
between buyers and sellers by ensuring that they work in the
same pricing units. The third function of money is as a store of
value. A store of value allows the exchange of current consumption for
future consumption. The fourth function of money is as a means to
liquidity. Liquidity describes the ease with which an item can be
traded for something that you want, or into the common currency within
an economy.
Problem :
Describe the basic types of money.
There are two basic types of money. Commodity money is anything that can
fulfill the four functions of money; it often bears
an intrinsic value, like metals and jewels. Fiat money is money that lacks
intrinsic value, but usually carries government backing.
Problem :
Could milk be used as a form of money? Why or why not?
Milk would be a very poor form of money because it does not fulfill the
four functions of money. It is not a common medium of exchange or
unity of account. It does not store value well because it sours. Also, it
is not liquid since it is difficult to exchange for goods and services desired.
Problem :
Could diamonds be used as a form of money? Why or why not?
Diamonds would be a decent form of currency. They fulfill some of the
four functions of money. They have a set value and can be used as a
medium of exchange and a store of value. They do not work well as a
unit of account though since their size and quality vary. They are
also only slightly liquid because they are not easy to exchange for desired
goods and services.
Problem :
What element is most important to the successful implementation
Of fiat money?
The most important element to the successful implementation of fiat
money is a regulation board, like the government, which oversees the
production and distribution of the currency. Without a regulation board, fiat
money has no value.
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