TSR Wiki > Study Help > Subjects and Revision > Revision Notes > Economics > Essential Functions of Money
- Medium of Exchange: acts as a medium of exchange hence permits a time interval between buying and selling commodities; thus eliminates need for a ‘double coincidence of wants’ implied by bartering, as one can sell goods and services without simultaneously purchasing. (Most important)
- Store of Value: Able to perform function as Medium of Exchange because it retains value over time. (Though real value eroded at the rate of inflation the higher inflation gets, the worse it performs this function.) not perfect (infl) but has advantage that in princip: readily divisible.
- Standard of Deferred Payment: (closely related to Store of Value function) Loans and future payments are agreed and contracted in money terms, as money units are accepted as the means of settling future accounts. But money only adequate if prot. v. inflation so can be store of value.
- Unit of Account: the unit of account in which prices quoted and accounting records kept. Not essential could use other stable Numeraires but advantage of divisibility. Using 1 commodity as unit of account has efficiency gains with regard to transaction costs considerable reduction in number of independent exchange ratios needed compared to bartering: reduction in info needed for rational trading.
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