Definition, Measurement, and Functions of Money
Introduced| English | Meaning |
|---|---|
| medium of exchange/ˈmiːdɪəm ɒv eksˈtʃeɪndʒ/ | Something generally accepted as payment for goods and services. |
| barter/ˈbɑːtə/ | The direct exchange of goods or services without using money. |
| store of value/stɔː ɒv ˈvæljuː/ | Something that allows purchasing power to be held for future use. |
| unit of account/ˈjuːnɪt ɒv əˈkaʊnt/ | A common measure used to state prices, debts and the value of goods or services. |
| money supply/ˈmʌni səˈplaɪ/ | The stock of money available in an economy at a particular time, measured using a specified definition. |
| commodity money/kəˈmɒdɪti ˈmʌni/ | Money consisting of a good that also has value for uses other than serving as money. |
| fiat money/ˈfiːət ˈmʌni/ | Money accepted as currency without being redeemable for a fixed quantity of a commodity such as gold. |
What makes money, money?
- Money is anything widely accepted in trade.
- A ten-dollar note, a coin, a bank balance — all do the job.
- But why do we accept them, and how do we count them?
- Money does three jobs, comes in layers, and takes two forms.
The three functions of money
- Medium of exchange 交换媒介: it is accepted in payment, so we avoid clumsy barter 以物易物.
- Store of value 价值储藏: it holds its worth over time, so you can save it.
- Unit of account 记账单位: it is the common measuring stick for prices.
- One ten-dollar note can do all three at once.
The functions of money; the AP exam tests the first three
Which function of money?
Money is a medium of exchange (it pays), a store of value (it saves), and a unit of account (it prices). One object does all three.
Money used to pay for goods, avoiding barter, is acting as a:
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Accepting money in payment is the medium-of-exchange function.
Select all three functions of money.
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Money is a medium of exchange, a store of value and a unit of account.
Money you keep to spend next year is acting as a store of value.
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Holding value over time is exactly the store-of-value function.
Measuring the money supply
- The money supply 货币供给 is measured in layers by how liquid it is.
- M1 counts the most liquid money: cash and checking deposits.
- M2 counts M1 plus slightly less liquid savings, such as savings and small time deposits.
M1 counts:
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M1 is the most liquid layer; M2 adds slightly less liquid savings.
Match each measure to what it includes.
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M2 is broader and slightly less liquid than M1.
Two forms of money
- Commodity money 商品货币 has value in itself, like gold coins.
- Fiat money 法定货币 (today's paper notes) has value only because a government declares it legal money and people accept it.
- Fiat money works purely on trust and acceptance.
Paper money that has value only because the government declares it legal is called ______ money.
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Fiat money works on trust; commodity money has value in itself.
Money does three jobs: medium of exchange, store of value, and unit of account. The money supply is measured in layers — M1 (cash + checking) and M2 (M1 + savings). It takes two forms: commodity money (valuable in itself) and fiat money (valuable by government decree).
Write from an M1 of 1000
- People hold 200 in cash and 800 in checking accounts. Savings accounts hold 1500.
- Find M1.
Households hold 200 in cash and 800 in checking accounts. Savings accounts hold another 1500. What is M1, and is the savings balance inside it?
200 plus 800 is 1000.
What is M1?
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M1 is cash plus checking deposits, 200 plus 800.