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8-4 Money, Banking & Financial Institutions [CH 8

Figure 8.1 Money Functioning as a Unit of Account

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van Gogh’s “Irisis”

Functions of Money
Money is a tool that comes into contact with everyone. It facilitates the exchange of

goods and services. When counted, it may be used to determine wealth, and saved to
protect the value of accumulated wealth. Money performs these three basic functions
differently. Let us discuss these functions as they serve society.
medium of exchange Money serves primarily as a medium of exchange—that is, it facilitates the
Means of facilitating exchange of goods and services by neatly replacing bartering. Instead of the
exchange and eliminating cumbersomeness of exchanging milk for bread, where each has a different bulk value,
the need for a barter
system. money allows the creation of a less cumbersome form of exchange over the bulk of
bartered durable goods. For example, rather than follow the barter process of trading
wheat directly for gasoline or clothing, a farmer sells the wheat and uses the money
from that sale to purchase gasoline and make other purchases.
measure of value Money functions as a measure of value—a common denominator for measuring
A single common factor the value of all products and services. Money allows two dissimilar items to be valued
used to assign and and purchased on a similar basis by removing dissimilarities. How many loaves of
measure the value of all
goods and services. bread does it take to purchase a new suit of clothes? Assume that a new car will cost
$35,900; a New York steak sells for $15.50 per pound; and a 40-yard-line ticket to the
Rose Bowl football game costs $160. Using money as a common denominator aids in
comparing widely different products and services. The advertisement in Figure 8.1,
Dollar Rent A Car uses dollar bills to communicate the value of its low-price car rental

store of value service.
Temporary accumulation Money also functions as a temporary store of value. Money can be accumulated
of wealth until it is and saved until it is used to make a purchase. As a store of value, money retains its
needed for new worth (ability to purchase the same quantity of goods and services today or years from
purchases. today) over time. However, stored money is affected by inflation—which steals

money’s value. As prices increase during inflationary periods, the purchasing power of

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