How Money Is Used For Each Of Its Three Principal Functions

2701 WordsNov 25, 201511 Pages
1. Provide a practical example of money being used for each of its three principal functions. Money has three principle functions; it is a medium of exchange, unit of account and a store of value (Mishkin, 2016). An example of money being used as a medium of exchange is when money is used to pay for goods or services. It is easier to exchange money for goods and services than it is to barter your services by finding someone who has what you need and needs what you have. An example of money being used as a unit of account is when money is used to measure value. Money standardizes the value of items so we have a common measure. In referring the bartering world, we know how much money the farmer would need to pay his doctor bills, as the doctor’s services are valued in terms of dollars. The farmer then knows how many goods he needs to sell as his goods are also valued in terms of dollars. An example of money being used as a store of value is when it is a repository of purchasing power to be used a later time (Mishkin, 2016). People may choose not spend their money immediately, but save it and spend it at a later date. Saving this money is an example of money being used a store of value. 2. Compare and contrast M1 and M2 monetary aggregate measures of the U.S. money supply, in terms of their components and in terms of their practical uses. Together M1 and M2 is the measure of money in the money supply, money aggregates. M1 is the more liquid of assets including

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