Which Of The Following Is Not One Of The Function S Of Money: Coursehero

24.1 What Is Money?

Learning Objectives

1. Define coin and hash out its 3 bones functions.
2. Distinguish between commodity money and fiat money, giving examples of each.
3. Define what is meant by the coin supply and tell what is included in the Federal Reserve System'southward two definitions of it (M1 and M2).

If cigarettes and mackerel can be used as coin, then just what is money? Money is annihilation that serves as a medium of exchange. A medium of commutation is anything that is widely accepted as a means of payment. In Romania under Communist Party rule in the 1980s, for case, Kent cigarettes served as a medium of exchange; the fact that they could exist exchanged for other goods and services made them money.

Money, ultimately, is defined past people and what they do. When people utilise something every bit a medium of exchange, information technology becomes money. If people were to brainstorm accepting basketballs as payment for most goods and services, basketballs would be coin. We volition acquire in this chapter that changes in the mode people employ coin take created new types of money and inverse the mode money is measured in recent decades.

The Functions of Money

Money serves three basic functions. By definition, information technology is a medium of commutation. It also serves as a unit of measurement of account and as a store of value—as the "mack" did in Lompoc.

A Medium of Exchange

The substitution of goods and services in markets is among the nigh universal activities of human life. To facilitate these exchanges, people settle on something that will serve as a medium of exchange—they select something to be money.

We can understand the significance of a medium of substitution by considering its absence. Barter occurs when goods are exchanged directly for other goods. Because no one item serves as a medium of substitution in a barter economic system, potential buyers must find things that individual sellers will accept. A buyer might find a seller who will merchandise a pair of shoes for two chickens. Another seller might be willing to provide a haircut in commutation for a garden hose. Suppose you lot were visiting a grocery store in a barter economy. You would need to load upwards a truckful of items the grocer might take in exchange for groceries. That would be an uncertain matter; yous could not know when you headed for the store which items the grocer might hold to trade. Indeed, the complication—and cost—of a visit to a grocery store in a barter economy would be and so great that at that place probably would not be whatsoever grocery stores! A moment'southward contemplation of the difficulty of life in a barter economy volition demonstrate why human societies invariably select something—sometimes more than than one thing—to serve equally a medium of exchange, but as prisoners in federal penitentiaries accepted mackerel.

A Unit of Account

Ask someone in the United states of america what he or she paid for something, and that person will answer by quoting a price stated in dollars: "I paid $75 for this radio," or "I paid $xv for this pizza." People do not say, "I paid 5 pizzas for this radio." That statement might, of course, be literally true in the sense of the opportunity price of the transaction, but we do not report prices that mode for two reasons. Ane is that people practise not arrive at places like Radio Shack with five pizzas and wait to purchase a radio. The other is that the data would not be very useful. Other people may non remember of values in pizza terms, and then they might non know what we meant. Instead, we report the value of things in terms of money.

Money serves every bit a unit of account, which is a consistent ways of measuring the value of things. We use money in this style considering it is also a medium of substitution. When we study the value of a good or service in units of money, we are reporting what another person is likely to have to pay to obtain that good or service.

A Store of Value

The third part of money is to serve as a store of value, that is, an item that holds value over time. Consider a $xx bill that you accidentally left in a coat pocket a yr ago. When you find it, yous will be pleased. That is because you lot know the bill even so has value. Value has, in effect, been "stored" in that little piece of paper.

Money, of course, is not the only thing that stores value. Houses, office buildings, land, works of art, and many other bolt serve as a means of storing wealth and value. Money differs from these other stores of value past being readily exchangeable for other commodities. Its role every bit a medium of commutation makes it a convenient store of value.

Because money acts equally a store of value, it can exist used every bit a standard for hereafter payments. When y'all borrow money, for case, you typically sign a contract pledging to make a series of future payments to settle the debt. These payments will be fabricated using money, because coin acts as a shop of value.

Money is non a adventure-free shop of value, all the same. We saw in the chapter that introduced the concept of inflation that aggrandizement reduces the value of money. In periods of rapid aggrandizement, people may not want to rely on coin as a store of value, and they may turn to commodities such as land or gold instead.

Types of Money

Although coin can accept an extraordinary variety of forms, there are really just ii types of coin: money that has intrinsic value and money that does not take intrinsic value.

Commodity money is money that has value apart from its utilize as money. Mackerel in federal prisons is an case of commodity coin. Mackerel could be used to buy services from other prisoners; they could likewise exist eaten.

Gilded and argent are the most widely used forms of commodity money. Gold and silvery can be used as jewelry and for some industrial and medicinal purposes, so they accept value apart from their use equally money. The first known utilise of gold and silver coins was in the Greek city-country of Lydia in the beginning of the 7th century B.C. The coins were fashioned from electrum, a natural mixture of gold and silver.

Ane disadvantage of article money is that its quantity can fluctuate erratically. Golden, for example, was one form of money in the United States in the 19th century. Aureate discoveries in California and later in Alaska sent the quantity of money soaring. Some of this nation's worst bouts of inflation were set off by increases in the quantity of gold in circulation during the 19th century. A much greater problem exists with commodity money that can exist produced. In the southern part of colonial America, for example, tobacco served as money. There was a continuing trouble of farmers increasing the quantity of coin by growing more tobacco. The problem was sufficiently serious that vigilante squads were organized. They roamed the countryside burning tobacco fields in an effort to keep the quantity of tobacco, hence money, under control. (Remarkably, these squads sought to control the money supply by burning tobacco grown by other farmers.)

Another problem is that commodity coin may vary in quality. Given that variability, there is a trend for lower-quality commodities to drive higher-quality commodities out of circulation. Horses, for example, served as money in colonial New England. It was mutual for loan obligations to be stated in terms of a quantity of horses to exist paid back. Given such obligations, in that location was a tendency to employ lower-quality horses to pay back debts; college-quality horses were kept out of circulation for other uses. Laws were passed forbidding the use of lame horses in the payment of debts. This is an example of Gresham's police: the tendency for a lower-quality commodity (bad money) to bulldoze a higher-quality article (good money) out of apportionment. Unless a means tin exist found to control the quality of article coin, the tendency for that quality to decline can threaten its acceptability as a medium of substitution.

But something demand not have intrinsic value to serve as money. Fiat money is money that some authorisation, generally a government, has ordered to be accepted as a medium of commutation. The currency—paper money and coins—used in the United States today is fiat coin; it has no value other than its utilise as money. You will find that statement printed on each bill: "This note is legal tender for all debts, public and private."

Checkable deposits, which are balances in checking accounts, and traveler's checks are other forms of coin that accept no intrinsic value. They tin can exist converted to currency, but generally they are not; they simply serve equally a medium of exchange. If you want to buy something, you tin oftentimes pay with a check or a debit bill of fare. A bank check is a written order to a bank to transfer ownership of a checkable eolith. A debit card is the electronic equivalent of a check. Suppose, for example, that you have $100 in your checking account and you lot write a bank check to your campus bookstore for $30 or instruct the clerk to swipe your debit card and "charge" it $30. In either case, $30 will be transferred from your checking account to the bookstore's checking account. Notice that information technology is the checkable deposit, not the check or debit bill of fare, that is money. The check or debit carte du jour just tells a bank to transfer money, in this case checkable deposits, from one account to another.

What makes something money is really found in its acceptability, not in whether or not it has intrinsic value or whether or not a government has declared it as such. For example, fiat coin tends to exist accepted so long as likewise much of it is non printed too quickly. When that happens, as it did in Russia in the 1990s, people tend to await for other items to serve as coin. In the case of Russian federation, the U.S. dollar became a pop form of coin, fifty-fifty though the Russian government withal declared the ruble to be its fiat money.

Heads Upwardly!

The term money, equally used by economists and throughout this book, has the very specific definition given in the text. People can concur avails in a diversity of forms, from works of art to stock certificates to currency or checking account balances. Even though individuals may be very wealthy, only when they are property their assets in a course that serves as a medium of commutation do they, co-ordinate to the precise meaning of the term, take "money." To qualify as "money," something must be widely accepted as a medium of commutation.

Measuring Money

The total quantity of money in the economy at whatever once is chosen the money supply. Economists mensurate the money supply because it affects economic activity. What should exist included in the coin supply? Nosotros want to include as office of the money supply those things that serve as media of exchange. Nevertheless, the items that provide this function have varied over time.

Before 1980, the basic money supply was measured as the sum of currency in circulation, traveler's checks, and checkable deposits. Currency serves the medium-of-exchange part very nicely just denies people any interest earnings. (Checking accounts did not earn involvement before 1980.)

Over the last few decades, peculiarly as a issue of high interest rates and high inflation in the late 1970s, people sought and found means of property their fiscal avails in ways that earn interest and that can easily be converted to money. For example, it is now possible to transfer coin from your savings account to your checking business relationship using an automated teller car (ATM), and then to withdraw cash from your checking business relationship. Thus, many types of savings accounts are hands converted into currency.

Economists refer to the ease with which an nugget can be converted into currency as the nugget's liquidity. Currency itself is perfectly liquid; you can always change ii $5 bills for a $10 bill. Checkable deposits are almost perfectly liquid; you can hands cash a bank check or visit an ATM. An part building, however, is highly illiquid. Information technology can be converted to money only by selling it, a time-consuming and costly procedure.

As financial avails other than checkable deposits take get more liquid, economists take had to develop broader measures of money that would correspond to economical activity. In the United States, the last arbiter of what is and what is not measured equally money is the Federal Reserve System. Considering information technology is difficult to determine what (and what not) to measure as coin, the Fed reports several different measures of money, including M1 and M2.

M1 is the narrowest of the Fed's money supply definitions. It includes currency in apportionment, checkable deposits, and traveler'south checks. M2 is a broader measure of the money supply than M1. It includes M1 and other deposits such every bit pocket-size savings accounts (less than $100,000), as well as accounts such as money marketplace mutual funds (MMMFs) that place limits on the number or the amounts of the checks that tin can be written in a sure period.

M2 is sometimes called the broadly defined coin supply, while M1 is the narrowly defined coin supply. The assets in M1 may be regarded equally perfectly liquid; the assets in M2 are highly liquid, but somewhat less liquid than the avails in M1. Even broader measures of the money supply include large time-deposits, money market mutual funds held past institutions, and other assets that are somewhat less liquid than those in M2. Figure 24.1 "The Two Ms: Oct 2010" shows the composition of M1 and M2 in Oct 2010.

Figure 24.1 The Ii Ms: October 2010

M1, the narrowest definition of the money supply, includes assets that are perfectly liquid. M2 provides a broader measure of the coin supply and includes somewhat less liquid avails. Amounts correspond money supply data in billions of dollars for October 2010, seasonally adjusted.

Source: Federal Reserve Statistical Release H.half-dozen, Tables 3 and 4 (December 2, 2010). Amounts are in billions of dollars for October 2010, seasonally adjusted.

Heads Upwardly!

Credit cards are not money. A credit card identifies you lot equally a person who has a special arrangement with the card issuer in which the issuer volition lend yous money and transfer the proceeds to another party whenever you want. Thus, if you present a MasterCard to a jeweler as payment for a $500 band, the firm that issued you the carte du jour will lend you lot the $500 and send that money, less a service charge, to the jeweler. You, of course, will exist required to repay the loan later. But a menu that says yous have such a relationship is not coin, just as your debit card is not coin.

With all the operational definitions of coin available, which 1 should we utilize? Economists generally answer that question past request another: Which measure of money is most closely related to real GDP and the cost level? As that changes, and then must the definition of money.

In 1980, the Fed decided that changes in the ways people were managing their money made M1 useless for policy choices. Indeed, the Fed now pays niggling attention to M2 either. It has largely given up tracking a detail measure of the money supply. The choice of what to measure equally money remains the subject of standing research and considerable debate.

Key Takeaways

• Money is anything that serves as a medium of exchange. Other functions of money are to serve as a unit of account and as a store of value.
• Money may or may not have intrinsic value. Commodity coin has intrinsic value because it has other uses besides beingness a medium of exchange. Fiat money serves just every bit a medium of exchange, considering its employ equally such is authorized by the government; it has no intrinsic value.
• The Fed reports several different measures of coin, including M1 and M2.

Endeavor It!

Which of the following are money in the The states today and which are non? Explain your reasoning in terms of the functions of money.

1. Gold
2. A Van Gogh painting
3. A dime

Example in Point: Fiat-less Money

"We don't take a currency of our own," proclaimed Nerchivan Barzani, the Kurdish regional regime'southward prime minister in a news interview in 2003. But, even without official recognition by the government, the so-called "Swiss" dinar certainly seemed to function as a fiat coin. Here is how the Kurdish area of northern Iraq, during the period between the Gulf War in 1991 and the fall of Saddam Hussein in 2003, came to have its own currency, despite the pronouncement of its prime government minister to the contrary.

Afterward the Gulf War, the northern, mostly Kurdish area of Iraq was separated from the balance of Iraq though the enforcement of the no-wing-zone. Considering of United nations sanctions that barred the Saddam Hussein regime in the south from continuing to import currency from Switzerland, the central bank of Iraq announced it would supersede the "Swiss" dinars, so named because they had been printed in Switzerland, with locally printed currency, which became known as "Saddam" dinars. Iraqi citizens in southern Iraq were given three weeks to exchange their old dinars for the new ones. In the northern part of Iraq, citizens could not commutation their notes and so they simply continued to use the old ones.

And so it was that the "Swiss" dinar for a period of about 10 years, fifty-fifty without government bankroll or any constabulary establishing it as legal tender, served as northern Iraq'southward fiat money. Economists utilize the word "fiat," which in Latin means "let information technology be done," to describe money that has no intrinsic value. Such forms of money normally get their value considering a government or authority has declared them to be legal tender, but, equally this story shows, it does non actually require much "fiat" for a convenient, in-and-of-itself worthless, medium of substitution to evolve.

What happened to both the "Swiss" and "Saddam" dinars? After the Coalition Conditional Authority (CPA) assumed control of all of Iraq, Paul Bremer, then head of the CPA, announced that a new Iraqi dinar would be exchanged for both of the existing currencies over a three-month period catastrophe in January 2004 at a charge per unit that implied that one "Swiss" dinar was valued at 150 "Saddam" dinars. Because Saddam Hussein's regime had printed many more "Saddam" dinars over the 10-yr period, while no "Swiss" dinars had been printed, and because the cheap printing of the "Saddam" dinars made them easy to counterfeit, over the decade the "Swiss" dinars became relatively more valuable and the substitution rate that Bremer offered nigh equalized the purchasing power of the two currencies. For example, it took about 133 times equally many "Saddam" dinars as "Swiss" dinars to buy a human'due south accommodate in Iraq at the time. The new notes, sometimes called "Bremer" dinars, were printed in Britain and elsewhere and flown into Iraq on 22 flights using Boeing 747s and other large aircraft. In both the northern and southern parts of Iraq, citizens turned in their quondam dinars for the new ones, suggesting at least more confidence at that moment in the "Bremer" dinar than in either the "Saddam" or "Swiss" dinars.

Sources: Mervyn A. King, "The Institutions of Monetary Policy" (lecture, American Economics Association Annual Meeting, San Diego, January 4, 2004), available at http://world wide web.bankofengland.co.uk/speeches/speech208.pdf. Hal R. Varian, "Paper Currency Can Have Value without Government Backing, only Such Backing Adds Substantially to Its Value," New York Times, Jan xv, 2004, p. C2.

Answer to Try It! Problem

1. Gold is not money because it is not used as a medium of exchange. In addition, it does not serve as a unit of account. Information technology may, however, serve as a shop of value.
2. A Van Gogh painting is not coin. It serves as a store of value. It is highly illiquid only could eventually exist converted to coin. It is neither a medium of exchange nor a unit of measurement of account.
3. A dime is money and serves all three functions of money. Information technology is, of grade, perfectly liquid.

Source: https://open.lib.umn.edu/principleseconomics/chapter/24-1-what-is-money/

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