There are four basic functions of money:
The first is as a medium of exchange.
The second is as a unit of account.
The third is as a store of value.
The fourth is as liquidity.
The most obvious function of money is as a medium of exchange. When you hand the waiter a five-dollar bill in exchange for your hamburger, you are using money as a medium of exchange. You might have a hard time paying for your hamburger with five dollars worth of apples, but if you did, the apples would serve as a medium of exchange as well. To simplify, a medium of exchange is something that buyers give to sellers in exchange for goods and services. Perhaps money's most compelling advantage is that it is a commonly recognized and universally accepted medium of exchange. This allows anyone with money to walk into any restaurant with the confidence that the waiter or clerk will take your cash in exchange for goods or services. This would likely not be the case with a basket full of apples. The second function of money, as a unit of account, is rather obvious, but you may never have considered it before. When you walk into a restaurant, the menu tells you that a hamburger costs $5 and a steak costs $15. You know what this means and are able to compare these prices. If, on the other hand, apples and oranges were used as units of account, comparison between the costs of goods and services would be much more difficult. Imagine trying to determine what costs more, a hamburger costing 25 apples or a steak costing 30 oranges. As a unit of account, money serves as the common base of comparison that people use to present prices and record debts. Without a common unit of account, these tasks would be much more difficult.
The third function of money, as a store of value, is one that we all know well. When you work, you are paid a wage. The portion of that wage that you do not spend gets saved. By saving money, you are able to spend some now and some later. In this way, money serves as a...
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