Reference no: EM131740148 , Length: word count:100

Three Functions of Money

According to Mankiw (2015):

Money is an asset that can be quickly exchanged for any other asset or good. Money serves three functions:

1. A medium of exchange.
2. A unit of account.
3. A store of value. (p. 219)

The first two functions -- a medium of exchange and a unit of account -- are straight forward concepts. For example, a $20 dollar bill is exchangeable for goods or services that cost $20 or less; it is worth 20 one-dollar "units."

The third function, a store of value, is bit more difficult. Money's store of value is measured by its purchasing power over time. It's measured by various price indexes, such as the consumer price index, the producer price index, and various other price indexes, which are compiled by the Bureaus of Labor Statistics and Economic Analysis. Even in the U.S., which has the most acceptable currency in the world, few people hold money as a long-term store of value because it loses a significant amount of its value over time. For example, according to the Bureau of Labor Statistics Inflation Calculator, if you "stored" $100 under your mattress 25 years ago, that $100 would have retained less than one-third of its purchasing power.

Class - What real-world examples do you have of the three functions of money?

References

Mankiw, N.G. (2015). Brief principles of macroeconomics,7e (7th ed.). Stamford, CT: Cengage Learning.