Definition, Measurement, and Functions of Money
Introduced| English |
|---|
| medium of exchange/ˈmiːdɪəm ɒv eksˈtʃeɪndʒ/ |
| barter/ˈbɑːtə/ |
| store of value/stɔː ɒv ˈvæljuː/ |
| unit of account/ˈjuːnɪt ɒv əˈkaʊnt/ |
| money supply/ˈmʌni səˈplaɪ/ |
| commodity money/kəˈmɒdɪti ˈmʌni/ |
| fiat money/ˈfiːət ˈmʌni/ |
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.
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:
Accepting money in payment is the medium-of-exchange function.
Select all three functions of money.
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.
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:
M1 is the most liquid layer; M2 adds slightly less liquid savings.
Match each measure to what it includes.
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.
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).