Lisa Mauro Economics I Chapter 31 Homework 1. 3 basic functions of money? How rapid inflation can undermine money’s ability to perform each of the three functions. 1) Medium of Exchange ~ used a an exchange for goods and services; retains value until ready to be spent. When inflation occurs we revert to barter. 2) Unit of Account ~ uses dollars as a measure of relative worth for goods and services. Inflation: drastic inflation reduces money’s use as a measure of value, as it is impossible to adjust instantly all prices in line with their relative values 3) Store of Value ~ Transfer purchasing power from present to future. Inflation: Destroyed in drastic inflation. The rule of 70 is applied here. By applying the rule of 70 you can estimate how long it will take the dollar to lose half the purchasing power. 3. Explain the following statements: A. The invention of money is one of the great achievements of humankind, for without it the enrichment that comes from broadening trade would have been impossible. Without money, trade must occur through barter. Barter requires each party to have something each
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