Money: Problems 1 | SparkNotes

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.