Chapter 15, Problem 15.1LO

To determine

To state:

Fundamental functions of money and necessary properties to function as money.

Answer to Problem 15.1LO

Fundamental Functions of money: These are the basic functions of money and they are common for all the money throughout the world. Three of the basic functions of money are medium of exchange, measure of value and store of value.

Necessary properties required for money: There are certain properties which are required for a good to make it ideal to be treated as money. These include general acceptability, portability, homogeneity, durability, divisibility, malleability and stability of value.

Explanation of Solution

Fundamental functions of money:

Fundamental functions of money can be explained as under:

• Medium of exchange: The basic function of money is to act as a medium between two parties, buyer and seller, for completing the contracts. Any person can make payment for receiving any goods or services in the form of money.

• Measure of value: Another important function of money is to act as a measure of value. It acts as a common denomination for valuing different types of goods and services. Even exchange rate between two different currencies can be determined since all values are expressed in terms of money.

• Store of value: As money acts as a unit of account and is also accepted by everyone. Therefore, money can be readily used as a measure for payment and hence, it provides facility as a liquid store of value which can be used at any time.

Key properties of any good that can function as money must possess:

Any good that can function as money has to possess certain properties, which are as under:

• General acceptability: A form of money, that will be accepted by him/her for any payment.

• Portability: It must be easily transported in order to use as money. It must also have high value in small bulk.

• Durability: The good chosen to function as money must no deteriorate quickly as it passes from hands to hand and kept in reserve.

• Homogeneity: It is also necessary that all units or specimens of money are homogeneous.

• Divisibility: The material used must have capability of division and all the small parts must be equal to the aggregate.

• Malleability: Material used must be malleable so that desired shape can be given to it.

• Stability of value: The value of material must not fluctuate much.

Economics Concept Introduction

Concept Introduction:

Functions of money: In modern economy, money performs many functions, only a few of which can be classified as Fundamental functions. The fundamental functions are the most important among all others and it is with their help that money can be defined.

Properties of money: Any good requires certain properties to function as money.