Eastlacknotes.docx - Types and Uses of Money Although we use money every day it’s easy to overlook the technical aspects of our currency Money comes

Eastlacknotes.docx - Types and Uses of Money Although we...

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Types and Uses of Money Although we use money every day, it’s easy to overlook the technical aspects of our currency. Money comes in different forms and has different uses. It also has certain characteristics that, whether we realize it or not, make it recognizable to us as money. Uses of Money Money has three uses. It is a store of value , a medium of exchange , and a unit of account . Let’s explore the meaning of these uses. Money as a Store of Value Store of value is the ability of a good to retain its value if it is stored and used later. For example, when George sells his personal computer to buy a laptop, he might not have the chance to buy the laptop immediately. He can keep the money he received from selling his computer in his wallet or in his bank account. This money will still have the same value for some time. After a while, however, inflation may cause the value of that money to decrease. Money as a Medium of Exchange A medium of exchange is an instrument that determines the value of goods and services and can also be exchanged to purchase goods and services. For example, a person who buys a novel at a bookstore pays money in exchange for that book. The storeowner accepts money as an exchange for that book. Money makes transactions easier, because everyone in the same economic system is willing to trade money for goods and goods for money. Money as a Unit of Account Unit of account is a property that allows us to compare the values of goods and services. For example, Gera sees that an electronics store is having a sale on cameras. The camera she wants to buy costs $210. She checks the cost of the same camera in other stores and some shopping websites and realizes that they sell the same camera for $270. In this example, the dollar monetary unit was the measuring unit for prices.
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Characteristics of Money To be an effective medium of exchange, any form of money needs to possess six characteristics. Limited Supply Money needs to be in limited supply to ensure it retains its value. Let’s say a country chooses salt as a mode of currency. However, anyone who has access to seawater can boil it to produce salt. An unlimited supply of salt would lead to an uncontrolled increase in the supply of money, which would cause a rapid drop in its value. That’s why every economy needs to ensure a limited supply of money. In the United States, the Federal Reserve is responsible for controlling the money supply . Durability Durability is an object’s ability to withstand physical wear and tear. Money needs to be durable so that people can use it repeatedly. For example, money would not last long if it were made of regular paper. It would easily tear, burn, or deform. The paper currency we use today isn’t actually made of paper. Instead, it’s a special mixture of cotton and linen fiber, which makes it more durable than regular paper. Metal coins are even more durable than paper currency.
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