What are the functions of money What can serve as money Expl

What are the functions of money? What can serve as money? Explain the difference between commodity money and fiat money?

Solution

The three most important functions of money are -

• Medium of exchange

• store of value

• Unit of account

Other functions of money are - measure of value, standard of deferred payment, transfer of value, basis of credit, distribution of social income, general form of capital and maximum benefit.

• Money can be anything that serves as-

I) Medium of exchange - Something that people can use to buy and sell goods.

II) Store of value - Something which people can use to save and use later.

III) Unit of account - something that can be used to value goods and services.

• Commodity money is money that has intrinsic value and the value of commodity money depends on the material and goods with which the money is manufactured. For example- Gold, silver or, other precious metals or, any goods which has value in themselves as well as value in their use as money.

While Fiat money doesn\'t have any intrinsic value and it is completely useless without the guarantee from government. Also, Fiat money can loose it\'s worth anytime if people loose confidence in it.