Functions and Definitions of Money

Definitions of Money

According to Growther, money refers to anything that is generally accepted as a means of exchange. What’s more, it is that which at the same time acts as a measure and store of value.

John Maynard Keynes defines it as “that by delivery of which debts-contract and price-contracts are discharged, and in the shape of which a store of General Purchasing Power is held.”

Another economist named Alfred Marshal argues that money includes all things that are “current without doubt or special inquiry as a means of purchasing commodities and services and of defraying expenses.”

Functions of Money

1. Store of Value

Money is a way of transferring purchasing power from the present to the future. Money is not perishable; therefore, it can act as a store of wealth.

2. Unit of Account

Money provides the terms that make price quotation and debt recording possible. Money is a yardstick with which we measure economic transactions. With the function of money as a unit of measurement, a unitary value and a measure of value can be ascribed to goods and services.

3. Medium of Exchange

Money plays the role of the tool we use to buy goods and services. When money serves as a medium of exchange, it is used as a liquid asset and a debt settlement tool. For money to serve this purpose, it must have the following properties:

• money should be readily acceptable;
• money should have a known value;
• money should be easily divisible;
• money must have a high value relative to its weight; and
• money should be difficult to counterfeit.

Question

Money should be able to provide terms in which:

I. prices are quoted;

II. debts are recorded;

III. purchasing power is transferred from the present to the future; or

IV. goods are purchased.

A. I & II only

B. I, III & IV only

C. I, II, III & IV

Solution

The correct answer is C.

Money should be able to do all of the things mentioned in points I to IV.

Reading 16 LOS 16b:

Describe functions and definitions of money