16.1 The Meaning of Money

16.1 a. The Functions of Money

Money acts as a standard measure and common denomination of trade. As a result, it is a basis for quoting and bargaining prices. The different functions of money are [1]:

• A medium of exchange: When money is used to intermediate the exchange of goods and services, it is performing the function of a medium of exchange.
• A unit of account: A unit of account is a standard numerical unit of measurement of the market value of goods, services, and other transactions. Also known as a “measure” or “standard” of relative worth and deferred payment, a unit of account is a necessary prerequisite for the formulation of commercial agreements.
• A store of value: To act as a store of value, money must be able to be reliably saved, stored, and retrieved. Moreover, it must be predictably usable as a medium of exchange when it is retrieved. The value of the money must also remain stable over time. Put simply, money acting as a store of value allows its owner to transfer real purchasing power from the present to the future.

^{Functions of Money [2]}

16.1 b. The Kinds of Money

There are two main kinds of money [1]:

• Commodity Money: Commodity money value comes from the commodity out of which it is made. The commodity itself constitutes the money, and the money is the commodity.
• Fiat Money: Fiat money is money that derives its value from government regulation or law. Value is not derived from any intrinsic value or guarantee that it can be converted into a valuable commodity.

Example: The US dollar bill is an example of fiat currency while commodities that have been used as mediums of exchange include gold, silver, copper, rice, salt, peppercorns, large stones, decorated belts, shells, alcohol, cigarettes, cannabis, and candy [1].

^{Types of Money [3]}

16.1 c. Money supply

In economics, the money supply or money stock, is the total amount of money available in an economy at a specific time. There are several ways to define “money,” but standard measures usually include currency in circulation and demand deposits [1].

Demand deposits are claims against financial institutions that can be used for the purchase of goods and services. A demand deposit account is an account from which funds can be withdrawn at any time by check or cash withdrawal without giving the bank or financial institution any prior notice. Banks have the legal obligation to return funds held in demand deposits immediately upon demand [1].

Example: The currency and demand deposits are mostly counted as money supply in the US [1].

^{Money Supply [4]}