Completely define and explain the three functions of money i

Completely define and explain the three functions of money:

i. Medium of exchange

ii. Standard of value

iii. Store of value

Solution

As a medium of exchange, money is used to transact goods in exchange for money. For example, we purchase food by exchanging money, and here money is used as medium of exchange.

As a standard of value, money is used as a unit of value that is agreed-upon by different economic entities. For example, a dollar is an agreed-upon standard of value.

As a store of value, money is used as a commodity that has a value which can be used and returved in future. For example, if someone deposits $100 in a bank today, then in absence of inflation or interest rate, after 10 years the amount deposited will retain its value at $100 (Inflation will reduce its real value, and interest paid by bank will increase its nominal value after 10 years).